SOLUTIONS MANUAL for Advanced Accounting, 15th Edition by Joe Ben Hoyle, Schaefer and Doupnik | Complete 19 Chapters

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McGraw Hill LLC.
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,SOLUTION MANUAL FOR ixix ixix




ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS ixix ixix ixix ixix ixix ixix ixix ixix




SCHAEFER AND TIMOTHY DOUPNIK
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CHAPTER 1-19 ixix




CHAPTER 1 ixix




ixix THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
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Chapter Outline ixix




I. Four methods are principally used to account for an investment in equity securities
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along with a fair value option.
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A. Fair value method: applied by an investor when only a small percentage
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of a company‘s voting stock is held.
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1. The investor recognizes income when the investee declares a dividend.
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2. Portfolios are reported at fair value. If fair values are unavailable, ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix



investment is reported at cost.
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B. Cost Method: applied to investments without a readily determinable fair value.
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When the fair value of an investment in equity securities is not readily
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determinable, and the investment provides neither significant influence nor
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control, the investment may be measured at cost. The investment remains at
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cost unless ixix ixix




1. A demonstrable impairment occurs for the investment, or
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2. An observable price change occurs for identical or similar investments of the
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same issuer. ixix ixix




The investor typically recognizes its share of investee dividends declared as
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dividend income.
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C. Consolidation: when one firm controls another (e.g., when a parent has a ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix



majority interest in the voting stock of a subsidiary or control through variable
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interests, their financial statements are consolidated and reported for the
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combined entity. ixix ixix




D. Equity method: applied when the investor has the ability to exercise
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significant influence over operating and financial policies of the investee.
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1. Ability to significantly influence investee is indicated by several factors
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including representation on the board of directors, participation in policy-
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making, etc. ixix




2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
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McGraw Hill LLC. ixix ixix ixix

, outstanding voting stock of the investee is held by the investor. ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix




Current financial reporting standards allow firms to elect to use fair value for any
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new investment in equity shares including those where the equity method would
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otherwise apply. However, the option, once taken, is irrevocable. The investor
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recognizes both investee dividends and changes in fair value over time as income.
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II. Accounting for an investment: the equity method ixix ixix ixix ixix ixix ixix




A. The investor adjusts the investment account to reflect all changes in the equity
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of the investee company.
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B. The investor accrues investee income when it is reported in the investee‘s
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financial statements.
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C. Dividends declared by the investee create a reduction in the carrying amount of
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the Investment account. This book assumes all investee dividends are declared
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and paid in the same reporting period.
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III. Special accounting procedures used in the application of the equity method
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A. Reporting a change to the equity method when the ability to significantly
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influence an investee is achieved through a series of acquisitions.
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1. Initial purchase(s) will be accounted for by means of the fair value method
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(or at cost) until the ability to significantly influence is attained.
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2. When the ability to exercise significant influence occurs following a series of
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stock purchases, the investor applies the equity method prospectively. The
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total fair value at the date significant influence is attained is compared to
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the investee‘s book value to determine future excess fair value
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amortizations. ixix



B. Investee income from other than continuing operations ixix ixix ixix ixix ixix ixix



1. The investor recognizes its share of investee reported other
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comprehensive income (OCI) through the investment account and the
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investor‘s own OCI. ixix ixix ixix



2. Income items such as discontinued operations that are reported separately ixix ixix ixix ixix ixix ixix ixix ixix ixix



by the investee should be shown in the same manner by the investor. The
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materiality of these other investee income elements (as it affects the
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investor) continues to be a criterion for separate disclosure.
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C. Investee losses ixix



1. Losses reported by the investee create corresponding losses for the investor.
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2. A permanent decline in the fair value of an investee‘s stock should be
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recognized immediately by the investor as an impairment loss.
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3. Investee losses can possibly reduce the carrying value of the investment ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix



account to a zero balance. At that point, the equity method ceases to be
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applicable and the fair-value method is subsequently used.
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D. Reporting the sale of an equity investment ixix ixix ixix ixix ixix ixix



1. The investor applies the equity method until the disposal date to establish a
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proper book value. ixix ixix ixix



2. Following the sale, the equity method continues to be appropriate if enough ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix



shares are still held to maintain the investor‘s ability to significantly influence
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the investee. If that ability has been lost, the fair-value method is
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subsequently used. ixix ixix




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, Solution Manual For All Chapters
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IV. Excess investment cost over book value acquired ixix ixix ixix ixix ixix ixix



A. The price an investor pays for equity securities often differs significantly from
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the investee‘s underlying book value primarily because the historical cost
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based accounting model does not keep track of changes in a firm‘s fair
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value. ixix



B. Payments made in excess of underlying book value can sometimes be identified ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix



with specific investee accounts such as inventory or equipment.
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C. An extra acquisition price can also be assigned to anticipated benefits that are
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expected to be derived from the investment. In accounting, these amounts are
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presumed to reflect an intangible asset referred to as goodwill. Goodwill is
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calculated as any excess payment that is not attributable to specific identifiable
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assets and liabilities of the investee. Because goodwill is an indefinite-lived
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asset, it is not amortized.
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V. Deferral of intra-entity gross profit in inventory ixix ixix ixix ixix ixix ixix



A. The investor‘s share of intra-entity profits in ending inventory are not recognized
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until the transferred goods are either consumed or until they are resold to
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unrelated parties.ixix ixix



B. Downstream sales of inventory ixix ixix ixix



1. ―Downstream‖ refers to transfers made by the investor to the investee. ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix



2. Intra-entity gross profits from sales are initially deferred under the equity ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix



method and then recognized as income at the time of the inventory‘s
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eventual disposal. ixix ixix



3. The amount of gross profit to be deferred is the investor‘s ownership ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix



percentage multiplied by the markup on the merchandise remaining at the
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end of the year. ixix ixix ixix ixix



C. Upstream sales of inventory ixix ixix ixix



1. ―Upstream‖ refers to transfers made by the investee to the investor. ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix



2. Under the equity method, the deferral process for intra-entity gross profits is ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix ixix



identical for upstream and downstream transfers. The procedures are
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separately identified in Chapter One because the handling does vary within
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the consolidation process. ixix ixix ixix




Answers to Discussion Questions ixix ixix ixix




The textbook includes discussion questions to stimulate student thought and discussion.
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These questions are also designed to allow students to consider relevant issues that might
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otherwise be overlooked. Some of these questions may be addressed by the instructor in
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class to motivate student discussion. Students should be encouraged to begin by defining
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the issue(s) in each case. Next, authoritative accounting literature (FASB ASC) or other
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relevant literature can be consulted as a preliminary step in arriving at logical actions.
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Frequently, the FASB Accounting Standards Codification will provide the necessary
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support.
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Unfortunately, in accounting, definitive resolutions to financial reporting questions are not
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always available. Students often seem to believe that all accounting issues have been
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resolved in the past so that accounting education is only a matter of learning to apply
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historically prescribed procedures. However, in actual practice, the only real answer is
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often the one that provides the fairest representation of the firm‘s transactions. If an
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authoritative solution is not available, students should be directed to list all of the issues
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involved and the consequences of possible alternative actions. The various factors
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presented can be weighed to produce a viable solution.
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