Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle | Complete Solutions & Answers

,ACCESS Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle
o o o o o o o o o o

Chaptero01o-oTheoEquityoMethodoofoAccountingoforoInvestmentso–
oHoyle,oSchaefer,oDoupnik,oFundamentalsoofoAdvanced oAccounting,o9/e




CHAPTER 1 o o



THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
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ChapteroOutline

I. Fouromethodsoareoprincipallyousedotooaccountoforoanoinvestmentoinoequityosecuritiesoalongo
withoaofairovalueooption.

A. Fairovalueomethod:oappliedobyoanoinvestorowhenoonlyoaosmallopercentageoofoao
company’sovotingostockoisoheld.

1. Theoinvestororecognizesoincomeowhenotheoinvesteeodeclaresoaodividend.

2. Portfoliosoareoreportedoatofairovalue.oIfofairovaluesoareounavailable,oinvestmentoiso
reportedoatocost.

B. CostoMethod:oappliedotooinvestmentsowithoutoaoreadilyodeterminableofairovalue.oWhenot
heofairovalueoofoanoinvestmentoinoequityosecuritiesoisonotoreadilyodeterminable,oandotheoi
nvestmentoprovidesoneitherosignificantoinfluenceonorocontrol,otheoinvestmentomayobeom
easuredoatocost.oTheoinvestmentoremainsoatocostounless

1. Aodemonstrableoimpairmentooccursoforotheoinvestment,oor

2. Anoobservableopriceochangeooccursoforoidenticaloorosimilaroinvestmentsoofotheosameoi
ssuer.
Theoinvestorotypicallyorecognizesoitsoshareoofoinvesteeodividendsodeclaredoasodividendoin
come.

C. Consolidation:owhenooneofirmocontrolsoanothero(e.g.,owhenoaoparentohasoaomajorityoin
terestoinotheovotingostockoofoaosubsidiaryoorocontrolothroughovariableointerests,otheirofin
ancialostatementsoareoconsolidatedoandoreportedoforotheocombinedoentity.

D. Equityomethod:oappliedowhenotheoinvestorohasotheoabilityotooexerciseosignificanto
influenceooverooperatingoandofinancialopoliciesoofotheoinvestee.

1. Abilityotoosignificantlyoinfluenceoinvesteeoisoindicatedobyoseveralofactorsoincludingo
representationoonotheoboardoofodirectors,oparticipationoinopolicy-making,oetc.

2. GAAPoguidelinesopresumeotheoequityomethodoisoapplicableoifo20otoo50opercentoofotheo
outstandingovotingostockoofotheoinvesteeoisoheldobyotheoinvestor.

Currentofinancialoreportingostandardsoallowofirmsotooelectotoouseofairovalueoforoanyonewoinves
tmentoinoequityosharesoincludingothoseowhereotheoequityomethodowouldootherwiseoapply.oHo
wever,otheooption,oonceotaken,oisoirrevocable.oTheoinvestororecognizesobothoinvesteeodivide
ndsoandochangesoinofairovalueooverotimeoasoincome.




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,ACCESS Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle
o o o o o o o o o o

Chaptero01o-oTheoEquityoMethodoofoAccountingoforoInvestmentso–
oHoyle,oSchaefer,oDoupnik,oFundamentalsoofoAdvanced oAccounting,o9e




II. Accountingoforoanoinvestment:otheoequityomethod

A. Theoinvestoroadjustsotheoinvestmentoaccountotooreflectoallochangesoinotheoequityoofotheoi
nvesteeocompany.

B. Theoinvestoroaccruesoinvesteeoincomeowhenoitoisoreportedoinotheoinvestee’sofinancialo
statements.

C. DividendsodeclaredobyotheoinvesteeocreateoaoreductionoinotheocarryingoamountoofotheoIn
vestmentoaccount.oThisobookoassumesoalloinvesteeodividendsoareodeclaredoandopaidoino
theosameoreportingoperiod.

III. Specialoaccountingoproceduresousedoinotheoapplicationoofotheoequityomethod
A. Reportingoaochangeotootheoequityomethodowhenotheoabilityotoosignificantlyoinfluenceoanoi
nvesteeoisoachievedothroughoaoseriesoofoacquisitions.
1. Initialopurchase(s)owillobeoaccountedoforobyomeansoofotheofairovalueomethodo(oroato
cost)ountilotheoabilityotoosignificantlyoinfluenceoisoattained.
2. Whenotheoabilityotooexerciseosignificantoinfluenceooccursofollowingoaoseriesoofostocko
purchases,otheoinvestoroappliesotheoequityomethodoprospectively.oTheototalofairovalu
eoatotheodateosignificantoinfluenceoisoattainedoisocomparedotootheoinvestee’sobookova
lueotoodetermineofutureoexcessofairovalueoamortizations.
B. Investeeoincomeofromootherothanocontinuingooperations
1. Theoinvestororecognizesoitsoshareoofoinvesteeoreportedootherocomprehensiveo
incomeo(OCI)othroughotheoinvestmentoaccountoandotheoinvestor’soownoOCI.
2. Incomeoitemsosuchoasodiscontinuedooperationsothatoareoreportedoseparatelyobyotheoi
nvesteeoshouldobeoshownoinotheosameomannerobyotheoinvestor.oTheomaterialityoofoth
eseootheroinvesteeoincomeoelementso(asoitoaffectsotheoinvestor)ocontinuesotoobeoaocri
terionoforoseparateodisclosure.
C. Investeeolosses
1. Lossesoreportedobyotheoinvesteeocreateocorrespondingolossesoforotheoinvestor.
2. Aopermanentodeclineoinotheofairovalueoofoanoinvestee’sostockoshouldobeorecognizedoi
mmediatelyobyotheoinvestoroasoanoimpairmentoloss.
3. Investeeolossesocanopossiblyoreduceotheocarryingovalueoofotheoinvestmentoaccountot
ooaozeroobalance.oAtothatopoint,otheoequityomethodoceasesotoobeoapplicableoandotheof
air-valueomethodoisosubsequentlyoused.
D. Reportingotheosaleoofoanoequityoinvestment
1. Theoinvestoroappliesotheoequityomethodountilotheodisposalodateotooestablishoaopropero
bookovalue.
2. Followingotheosale,otheoequityomethodocontinuesotoobeoappropriateoifoenoughoshareso
areostilloheldotoomaintainotheoinvestor’soabilityotoosignificantlyoinfluenceotheoinvestee.oI
fothatoabilityohasobeenolost,otheofair-valueomethodoisosubsequentlyoused.

IV. Excessoinvestmentocostooverobookovalueoacquired
A. Theopriceoanoinvestoropaysoforoequityosecuritiesooftenodiffersosignificantlyofromotheoi
nvestee’sounderlyingobookovalueoprimarilyobecauseotheohistoricalocostobasedoacco
untingomodelodoesonotokeepotrackoofochangesoinoaofirm’sofairovalue.
B. Paymentsomadeoinoexcessoofounderlyingobookovalueocanosometimesobeoidentifiedowitho
specificoinvesteeoaccountsosuchoasoinventoryooroequipment.
C. Anoextraoacquisitionopriceocanoalsoobeoassignedotooanticipatedobenefitsothatoareoexpect
edotoobeoderivedofromotheoinvestment.oInoaccounting,otheseoamountsoareopresumedotoo
reflectoanointangibleoassetoreferredotooasogoodwill.oGoodwilloisocalculated



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, ACCESS Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle
o o o o o o o o o o

Chaptero01o-oTheoEquityoMethodoofoAccountingoforoInvestmentso–
oHoyle,oSchaefer,oDoupnik,oFundamentalsoofoAdvanced oAccounting,o9/e




asoanyoexcessopaymentothatoisonotoattributableotoospecificoidentifiableoassetsoandoliabiliti
esoofotheoinvestee.oBecauseogoodwilloisoanoindefinite-livedoasset,oitoisonotoamortized.

V. Deferraloofointra-entityogrossoprofitoinoinventory
A. Theoinvestor’soshareoofointra-
entityoprofitsoinoendingoinventoryoareonotorecognizedountilotheotransferredogoodsoareoeith
eroconsumedoorountilotheyoareoresoldotoounrelatedoparties.
B. Downstreamosalesoofoinventory
1. “Downstream”orefersotootransfersomadeobyotheoinvestorotootheoinvestee.
2. Intra-
entityogrossoprofitsofromosalesoareoinitiallyodeferredounderotheoequityomethodoandot
henorecognizedoasoincomeoatotheotimeoofotheoinventory’soeventualodisposal.
3. Theoamountoofogrossoprofitotoobeodeferredoisotheoinvestor’soownershipopercentageo
multipliedobyotheomarkupoonotheomerchandiseoremainingoatotheoendoofotheoyear.
C. Upstreamosalesoofoinventory
1. “Upstream”orefersotootransfersomadeobyotheoinvesteeotootheoinvestor.
2. Underotheoequityomethod,otheodeferraloprocessoforointra-
entityogrossoprofitsoisoidenticaloforoupstreamoandodownstreamotransfers.oTheoproce
duresoareoseparatelyoidentifiedoinoChapteroOneobecauseotheohandlingodoesovaryowit
hinotheoconsolidationoprocess.


AnswersotooDiscussionoQuestions
Theotextbookoincludesodiscussionoquestionsotoostimulateostudentothoughtoandodiscussion.oTheseoq
uestionsoareoalsoodesignedotooallowostudentsotooconsiderorelevantoissuesothatomightootherwiseobeoo
verlooked.oSomeoofotheseoquestionsomayobeoaddressedobyotheoinstructoroinoclassotoomotivateostude
ntodiscussion.oStudentsoshouldobeoencouragedotoobeginobyodefiningotheoissue(s)oinoeachocase.oNext
,oauthoritativeoaccountingoliteratureo(FASBoASC)oorootherorelevantoliteratureocanobeoconsultedoasoao
preliminaryostepoinoarrivingoatologicaloactions.oFrequently,otheoFASBoAccountingoStandardsoCodific
ationowilloprovideotheonecessaryosupport.

Unfortunately,oinoaccounting,odefinitiveoresolutionsotoofinancialoreportingoquestionsoareonotoalwaysoa
vailable.oStudentsooftenoseemotoobelieveothatoalloaccountingoissuesohaveobeenoresolvedoinotheopasto
soothatoaccountingoeducationoisoonlyoaomatteroofolearningotooapplyohistoricallyoprescribedoprocedure
s.oHowever,oinoactualopractice,otheoonlyorealoansweroisooftenotheooneothatoprovidesotheofairestorepres
entationoofotheofirm’sotransactions.oIfoanoauthoritativeosolutionoisonotoavailable,ostudentsoshouldobeod
irectedotoolistoalloofotheoissuesoinvolvedoandotheoconsequencesoofopossibleoalternativeoactions.oTheo
variousofactorsopresentedocanobeoweighedotooproduceoaoviableosolution.

Theodiscussionoquestionsoareodesignedotoohelpostudentsodeveloporesearchoandocriticalothinkingoskill
soinoaddressingoissuesothatogoobeyondotheopurelyomechanicaloelementsoofoaccounting.

DidotheoCostoMethodoInviteoManipulation?
Theocostomethodoofoaccountingoforoinvestmentsooftenocausedoaolackoofoobjectivityoinoreportedoincom
eofigures.oWithoaolargeoblockoofotheoinvestee’sovotingoshares,oanoinvestorocouldoinfluenceotheoamoun
toandotimingoofotheoinvestee’sodividendodeclarations.oThus,owhenoenjoyingoaogoodoearningsoyear,oan
oinvestoromightoinfluenceotheoinvesteeotoowithholdodeclaringoaodividendountiloneededoinoaosubsequen

toyear.oAlternatively,oifotheoinvestorojudgedothatoitsocurrentoyearoearningso“neededoaoboost,”oitomightoi
nfluenceotheoinvesteeotoodeclareoaocurrentoyearodividend.oTheoequityomethodoeffectivelyoremovesom
anagers’oabilityotooincreaseocurrentoincomeo(orodeferoincomeotoofutureoperiods)othroughotheiroinfluen
ceooverotheotimingoandoamountsoofoinvesteeodividendodeclarations.


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