2-1
© McGrawxHill LLC. All rights reserved. No reproduction or distribution without the prior written consentxof McGrawxHill LLC.
,SOLUTION MANUAL FOR
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAEFE
R and TIMOTHY DOUPNIK
x
CHAPTER 1-19
CHAPTER1 TH
EEQUITYMETHODOFACCOUNTINGFORINVESTMENTS
Chapter Outline
I. Four Methods Are Principally Used To account For An Investment In Equity Securities
x
Along Wi Th A Fair Value Option.
A. Fair Value Method: Applied By An Investor When Only A Small Percentage Of
A Co Mpany‘S Voting Stock is Held. x
1. The Investor Recognizes Income When The Investee Declares A Dividend.
2. Portfolios Are Reported At fair Value. If Fair Values Are Unavailable, Investment
x
Is Re Ported At cost. x
B. Cost method: Applied To Investments Without A Readily Determinable Fair Value.
x
When Th E Fair Value Of An Investment in Equity Securities is Not Readily
x x
Determinable, And The Inve Stment Provides Neither Significant influence nor Control, x x
The Investment may Be Measur Ed At cost. The Investment Remains At cost unless
x x x x
1. A demonstrable Impairment Occurs for The Investment, Or
x x
2. An Observable Price Change Occurs For Identical Or Similar Investments Of The
Same Is Suer.
The Investor Typically Recognizes its share Of Investee Dividends Declared As Dividend
x x
Inc Ome.
C. Consolidation: When One firm Controls another (E.G., When A Parent has A Majority
x x x
Inte Rest in The Voting Stock Of A Subsidiary Or Control Through Variable Interests,
x
Their Financ Ial Statements Are Consolidated And Reported For The Combined
Entity.
D. Equity Method: Applied When The Investor Has The ability To Exercise x
Significant In Fluence Over Operating And Financial Policies Of The Investee.
1. Ability To significantly Influence Investee Is Indicated By Several
x
Factors including R Epresentation On The board Of Directors, Participation In
x x
Policy-Making, Etc.
2. GAAP Guidelines Presume The Equity Method Is Applicable If 20 To 50 percent Of The x x
2-1
© McGrawxHill LLC. All rights reserved. No reproduction or distribution without the prior written consentxof McGrawxHill LLC.
, Outstanding Voting Stock Of The Investee Is Held By The Investor.
Current Financial Reporting Standards Allow Firms To Elect to Use fair Value For Any New x x
Invest Ment in Equity Shares Including Those Where The Equity Method Would Otherwise
x
Apply. Howe Ver, The Option, Once Taken, Is Irrevocable. The Investor Recognizes Both
Investee Dividends And Changes In Fair Value Over Time as Income. x
II. Accounting For An Investment: The Equity Method
A. The Investor Adjusts The investment Account To Reflect all Changes In The Equity Of
x x
The in Vestee company.
x x
B. The Investor Accrues Investee Income When It Is Reported In The Investee‘S
Financial St Atements.
C. Dividends Declared By The investee Create A Reduction In The Carrying Amount of
x x
The Inve Stment Account. This Book Assumes All Investee Dividends Are Declared
And Paid In The Same Reporting Period.
III. Special Accounting Procedures Used In The Application Of The Equity Method
A. Reporting A Change To The Equity Method When The ability To Significantly Influence x
An In Vestee is achieved Through A Series Of Acquisitions.
x x
1. Initial Purchase(S) Will Be Accounted For By Means of The Fair Value Method (Or x
At co St) Until The Ability To significantly Influence is Attained.
x x x
2. When The Ability To Exercise Significant Influence Occurs Following A Series Of
Stock p Urchases, The Investor Applies the Equity Method Prospectively. The Total
x x
Fair Value A T The date Significant Influence Is Attained Is Compared To the
x x
Investee‘S Book Value T O Determine Future Excess fair Value Amortizations. x
B. Investee Income From Other Than Continuing Operations
1. The Investor Recognizes Its Share Of Investee Reported Other
Comprehensive In Come (OCI) Through The investment Account and The x x
Investor‘S Own OCI.
2. Income Items Such As Discontinued Operations that Are Reported Separately By x
The in Vestee should Be Shown In The Same Manner By The Investor. The
x x
Materiality Of Thes E Other Investee Income Elements (As It Affects The Investor)
Continues To Be A Criteri On For Separate Disclosure.
C. Investee Losses
1. Losses Reported By The Investee Create corresponding Losses For The Investor.
x
2. A permanent Decline in The fair Value Of An Investee‘S Stock should Be
x x x x
Recognized Im Mediately By The Investor As An Impairment loss. x
3. Investee losses Can Possibly Reduce The carrying Value Of The investment
x x x
Account to A Zero balance. At That Point, The Equity Method Ceases To Be
x x x
Applicable And The fair- Value Method Is Subsequently Used.
x
D. Reporting The Sale Of An Equity Investment
1. The Investor Applies The Equity Method Until The Disposal Date To Establish A
Proper Bo Ok Value.
2. Following The Sale, The Equity Method Continues To Be Appropriate If Enough
Shares Ar E Still Held To Maintain The Investor‘S Ability To Significantly
Influence the Investee. If Th At ability Has Been Lost, The Fair-Value Method Is
x x
Subsequently Used.
, 2-24
© Mcgrawxhill LLC. All Rightsxreserved. No Reproduction Or Distribution Without The Prior Written Consentxof Mcgraw Hill LLC.
© McGrawxHill LLC. All rights reserved. No reproduction or distribution without the prior written consentxof McGrawxHill LLC.
,SOLUTION MANUAL FOR
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAEFE
R and TIMOTHY DOUPNIK
x
CHAPTER 1-19
CHAPTER1 TH
EEQUITYMETHODOFACCOUNTINGFORINVESTMENTS
Chapter Outline
I. Four Methods Are Principally Used To account For An Investment In Equity Securities
x
Along Wi Th A Fair Value Option.
A. Fair Value Method: Applied By An Investor When Only A Small Percentage Of
A Co Mpany‘S Voting Stock is Held. x
1. The Investor Recognizes Income When The Investee Declares A Dividend.
2. Portfolios Are Reported At fair Value. If Fair Values Are Unavailable, Investment
x
Is Re Ported At cost. x
B. Cost method: Applied To Investments Without A Readily Determinable Fair Value.
x
When Th E Fair Value Of An Investment in Equity Securities is Not Readily
x x
Determinable, And The Inve Stment Provides Neither Significant influence nor Control, x x
The Investment may Be Measur Ed At cost. The Investment Remains At cost unless
x x x x
1. A demonstrable Impairment Occurs for The Investment, Or
x x
2. An Observable Price Change Occurs For Identical Or Similar Investments Of The
Same Is Suer.
The Investor Typically Recognizes its share Of Investee Dividends Declared As Dividend
x x
Inc Ome.
C. Consolidation: When One firm Controls another (E.G., When A Parent has A Majority
x x x
Inte Rest in The Voting Stock Of A Subsidiary Or Control Through Variable Interests,
x
Their Financ Ial Statements Are Consolidated And Reported For The Combined
Entity.
D. Equity Method: Applied When The Investor Has The ability To Exercise x
Significant In Fluence Over Operating And Financial Policies Of The Investee.
1. Ability To significantly Influence Investee Is Indicated By Several
x
Factors including R Epresentation On The board Of Directors, Participation In
x x
Policy-Making, Etc.
2. GAAP Guidelines Presume The Equity Method Is Applicable If 20 To 50 percent Of The x x
2-1
© McGrawxHill LLC. All rights reserved. No reproduction or distribution without the prior written consentxof McGrawxHill LLC.
, Outstanding Voting Stock Of The Investee Is Held By The Investor.
Current Financial Reporting Standards Allow Firms To Elect to Use fair Value For Any New x x
Invest Ment in Equity Shares Including Those Where The Equity Method Would Otherwise
x
Apply. Howe Ver, The Option, Once Taken, Is Irrevocable. The Investor Recognizes Both
Investee Dividends And Changes In Fair Value Over Time as Income. x
II. Accounting For An Investment: The Equity Method
A. The Investor Adjusts The investment Account To Reflect all Changes In The Equity Of
x x
The in Vestee company.
x x
B. The Investor Accrues Investee Income When It Is Reported In The Investee‘S
Financial St Atements.
C. Dividends Declared By The investee Create A Reduction In The Carrying Amount of
x x
The Inve Stment Account. This Book Assumes All Investee Dividends Are Declared
And Paid In The Same Reporting Period.
III. Special Accounting Procedures Used In The Application Of The Equity Method
A. Reporting A Change To The Equity Method When The ability To Significantly Influence x
An In Vestee is achieved Through A Series Of Acquisitions.
x x
1. Initial Purchase(S) Will Be Accounted For By Means of The Fair Value Method (Or x
At co St) Until The Ability To significantly Influence is Attained.
x x x
2. When The Ability To Exercise Significant Influence Occurs Following A Series Of
Stock p Urchases, The Investor Applies the Equity Method Prospectively. The Total
x x
Fair Value A T The date Significant Influence Is Attained Is Compared To the
x x
Investee‘S Book Value T O Determine Future Excess fair Value Amortizations. x
B. Investee Income From Other Than Continuing Operations
1. The Investor Recognizes Its Share Of Investee Reported Other
Comprehensive In Come (OCI) Through The investment Account and The x x
Investor‘S Own OCI.
2. Income Items Such As Discontinued Operations that Are Reported Separately By x
The in Vestee should Be Shown In The Same Manner By The Investor. The
x x
Materiality Of Thes E Other Investee Income Elements (As It Affects The Investor)
Continues To Be A Criteri On For Separate Disclosure.
C. Investee Losses
1. Losses Reported By The Investee Create corresponding Losses For The Investor.
x
2. A permanent Decline in The fair Value Of An Investee‘S Stock should Be
x x x x
Recognized Im Mediately By The Investor As An Impairment loss. x
3. Investee losses Can Possibly Reduce The carrying Value Of The investment
x x x
Account to A Zero balance. At That Point, The Equity Method Ceases To Be
x x x
Applicable And The fair- Value Method Is Subsequently Used.
x
D. Reporting The Sale Of An Equity Investment
1. The Investor Applies The Equity Method Until The Disposal Date To Establish A
Proper Bo Ok Value.
2. Following The Sale, The Equity Method Continues To Be Appropriate If Enough
Shares Ar E Still Held To Maintain The Investor‘S Ability To Significantly
Influence the Investee. If Th At ability Has Been Lost, The Fair-Value Method Is
x x
Subsequently Used.
, 2-24
© Mcgrawxhill LLC. All Rightsxreserved. No Reproduction Or Distribution Without The Prior Written Consentxof Mcgraw Hill LLC.
