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