Solution Manual For Advanced Accounting, 15th Edition Author: Joe
Ben Hoyle, Schaefer and Doupnik| ISBN:9781264798483 All
Chapters Covered|100% Complete A+ Study Guide LATEST
VERSION
1|Page
,CHAPTER 1-19
CHAPTER1 TH
E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
Chapter Outline
Four methods are principally used to account for an investment in equity securities along with a fair value
option.
Fair value method: applied by an investor when only a small percentage of a
company‘s voting stock is held.
The investor recognizes income when the investee declares a dividend.
Portfolios are reported at fair value. If fair values are unavailable, investmen t is reported
at cost.
Cost Method: applied to investments without a readily determinable fair value. Whe n t he fair
value of an investment in equity securities is not readily determinable, an d the i nvestment
provides neither significant influence nor control, the investment may be m easured at cost. The
investment remains at cost unless
A demonstrable impairment occurs for the investment, or
An observable price change occurs for identical or similar investments of the sa me i ssuer.
The investor typically recognizes its share of investee dividends declared as divide nd i ncome.
Consolidation: when one firm controls another (e.g., when a parent has a majorit y in terest
in the voting stock of a subsidiary or control through variable interests, their fi nancial statements
are consolidated and reported for the combined entity.
Equity method: applied when the investor has the ability to exercise signific ant influence
over operating and financial policies of the investee.
Ability to significantly influence investee is indicated by several factors including representation on the
board of directors, participation in policy-making, etc.
GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution withoutYthe prior written consent of McGraw Hill LL
, 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 in ves tment in
equity shares including those where the equity method would otherwise ap ply. Ho wever, the option,
once taken, is irrevocable. The investor recognizes both inves tee divide nds and changes in fair value
over time as income.
Accounting for an investment: the equity method
The investor adjusts the investment account to reflect all changes in the equity of t he i nvestee
company.
The investor accrues investee income when it is reported in the investee‘s finan cial
statements.
Dividends declared by the investee create a reduction in the carrying amountHof the In vestment
account. This bookHassumes all investee dividends are declared and paid in the same reporting
period.
Special accounting procedures used in the application of the equity method
Reporting a change to the equity method when the ability to significantly influence an i nvestee is
achieved through a series of acquisitions.
Initial purchase(s) will be accounted for by means of the fair value method (o r at
cost) until the ability to significantly influence is attained.
When the ability to exercise significant influence occurs following a series of sto ck purchases,
the investor applies the equity method prospectively. The total fai
r valu e at the date significant influence is attained is compared to the investee‘
s book va lue to determine future excess fair value amortizations.
Investee income from other than continuing operations
The investor recognizes its share of investee reported other comprehensive income (OCI)
through the investment account and the investor‘s own OCI.
Income items such as discontinued operations that are reported separately by th e i nvestee
should be shown in the same manner by the investor. The materialit y of th ese other
investee income elements (as it affects the investor) continues to be a cri terion for separate
disclosure.
Investee losses
Losses reported by the investee create corresponding losses for the investor. AHpermanent
decline in the fair value of an investee‘s stock should be recogniz ed i mmediately by the
investor as an impairment loss.
Investee losses can possibly reduce the carrying value of the investment accou ntHt o a zero
balance. At that point, the equity method ceases to be applicable a nd the f air-value method
is subsequently used.
Reporting the sale of an equity investment
The investor applies the equity method until the disposal date to establish a pro per book
value.
Following the sale, the equity method continues to be appropriate if enough shar es are still held
to maintain the investor‘s ability to significantly influence the inve stee. I f that ability has been
lost, the fair-value method is subsequently used.
3|Page
, 2-24
© McGraw Hill LLC. All rights reserved. NoYreproduction or distribution without the prior written consent of McGraw Hill
Ben Hoyle, Schaefer and Doupnik| ISBN:9781264798483 All
Chapters Covered|100% Complete A+ Study Guide LATEST
VERSION
1|Page
,CHAPTER 1-19
CHAPTER1 TH
E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
Chapter Outline
Four methods are principally used to account for an investment in equity securities along with a fair value
option.
Fair value method: applied by an investor when only a small percentage of a
company‘s voting stock is held.
The investor recognizes income when the investee declares a dividend.
Portfolios are reported at fair value. If fair values are unavailable, investmen t is reported
at cost.
Cost Method: applied to investments without a readily determinable fair value. Whe n t he fair
value of an investment in equity securities is not readily determinable, an d the i nvestment
provides neither significant influence nor control, the investment may be m easured at cost. The
investment remains at cost unless
A demonstrable impairment occurs for the investment, or
An observable price change occurs for identical or similar investments of the sa me i ssuer.
The investor typically recognizes its share of investee dividends declared as divide nd i ncome.
Consolidation: when one firm controls another (e.g., when a parent has a majorit y in terest
in the voting stock of a subsidiary or control through variable interests, their fi nancial statements
are consolidated and reported for the combined entity.
Equity method: applied when the investor has the ability to exercise signific ant influence
over operating and financial policies of the investee.
Ability to significantly influence investee is indicated by several factors including representation on the
board of directors, participation in policy-making, etc.
GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution withoutYthe prior written consent of McGraw Hill LL
, 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 in ves tment in
equity shares including those where the equity method would otherwise ap ply. Ho wever, the option,
once taken, is irrevocable. The investor recognizes both inves tee divide nds and changes in fair value
over time as income.
Accounting for an investment: the equity method
The investor adjusts the investment account to reflect all changes in the equity of t he i nvestee
company.
The investor accrues investee income when it is reported in the investee‘s finan cial
statements.
Dividends declared by the investee create a reduction in the carrying amountHof the In vestment
account. This bookHassumes all investee dividends are declared and paid in the same reporting
period.
Special accounting procedures used in the application of the equity method
Reporting a change to the equity method when the ability to significantly influence an i nvestee is
achieved through a series of acquisitions.
Initial purchase(s) will be accounted for by means of the fair value method (o r at
cost) until the ability to significantly influence is attained.
When the ability to exercise significant influence occurs following a series of sto ck purchases,
the investor applies the equity method prospectively. The total fai
r valu e at the date significant influence is attained is compared to the investee‘
s book va lue to determine future excess fair value amortizations.
Investee income from other than continuing operations
The investor recognizes its share of investee reported other comprehensive income (OCI)
through the investment account and the investor‘s own OCI.
Income items such as discontinued operations that are reported separately by th e i nvestee
should be shown in the same manner by the investor. The materialit y of th ese other
investee income elements (as it affects the investor) continues to be a cri terion for separate
disclosure.
Investee losses
Losses reported by the investee create corresponding losses for the investor. AHpermanent
decline in the fair value of an investee‘s stock should be recogniz ed i mmediately by the
investor as an impairment loss.
Investee losses can possibly reduce the carrying value of the investment accou ntHt o a zero
balance. At that point, the equity method ceases to be applicable a nd the f air-value method
is subsequently used.
Reporting the sale of an equity investment
The investor applies the equity method until the disposal date to establish a pro per book
value.
Following the sale, the equity method continues to be appropriate if enough shar es are still held
to maintain the investor‘s ability to significantly influence the inve stee. I f that ability has been
lost, the fair-value method is subsequently used.
3|Page
, 2-24
© McGraw Hill LLC. All rights reserved. NoYreproduction or distribution without the prior written consent of McGraw Hill
