Advanced Accounting,
&vc
5th Edition
&vc
by Patrick Hopkins and Halsey
&vc &vc &vc &vc
TestBanksAdept
, Advanced Accounting
Fifth Edition
By Patrick E. Hopkins and Robert F. Halsey
Solution Manual
Chapter 1— Accounting for Intercorporate Investments
1. a. If the investor acquired 100% of the investee at book value, the Equity Investment
account is equal to the Stockholders’ Equity of the investee company. It, therefore,
includes the assets and liabilities of the investee company in one account. The
investor’s balance sheet, therefore, includes the Stockholders’ Equity of the investee
company, and, implicitly, its assets and liabilities. In the consolidation process, the
balance sheets of the investor and investee company are brought together.
Consolidated Stockholders’ Equity will be the same as that which the investor
currently reports; only total assets and total liabilities will change.
b. If the investor owns 100% of the investee, the equity income that the investor reports
is equal to the net income of the investee, thus implicitly including its revenues and
expenses. Replacing the equity income with the revenues and expenses of the
investee company in the consolidation process will yield the same net income.
2. FASB ASC 323-10 provides the following guidance with respect to the accounting for
receipt of dividends using the equity method:
The equity method tends to be most appropriate if an investment enables the
investor to influence the operating or financial decisions of the investee. The
investor then has a degree of responsibility for the return on its investment, and
it is appropriate to include in the results of operations of the investor its share of
the earnings or losses of the investee. (¶323-10-05-5)
The equity method is an appropriate means of recognizing increases or decreases
measured by generally accepted accounting principles (GAAP) in the economic resources
underlying the investments. Furthermore, the equity method of accounting more closely
meets the objectives of accrual accounting than does the cost method because the
investor recognizes its share of the earnings and losses of the investee in the periods in
which they are reflected in the accounts of the investee. (¶323-10-05-4)
Under the equity method, an investor shall recognize its share of the earnings or losses
of an investee in the periods for which they are reported by the investee in its financial
statements rather than in the period in which an investee declares a dividend (¶323-10-
35-4).
TestBanksAdept
,3. The &vcrecognition &vcof &vcequity &vcincome &vcdoes &vcnot &vcmean &vcthat &vccash &vchas &vcbeen
&vcreceived. &vcIn &vcfact, &vcdividends &vcpaid &vcby &vcthe &vcinvestee &vcto &vcthe &vcinvestor &vcare
&vctypically &vca &vcsmall &vcpercentage &vcof &vcits &vcreported &vcnet &vcincome. &vcThe &vcprojection &vcof
&vcfuture &vcnet &vcincome &vcthat &vcincludes &vcequity &vcincome &vcas &vca &vcsignificant &vccomponent
&vcmight &vcnot, &vctherefore, &vcimply &vcsignificant &vcgeneration &vcof &vccash.
4. The &vcaccounting &vcfor &vcAltria’s &vcinvestment &vcin &vcABI &vcdepends &vcon &vcthe &vcdegree &vcof
&vcinfluence &vcor &vccontrol &vcit &vccan &vcexert &vcover &vcthat &vccompany. &vcA &vcclassification &vcof &vc“no
&vcinfluence” &vcdoes &vcnot &vcappear &vcappropriate &vcsince &vcAltria &vcowns &vc10.1% &vcof &vcthe
&vcoutstanding &vccommon &vcstock &vcand &vcalso &vc“active &vcrepresentation &vcon &vcABI’s &vcBoard
&vcof &vcDirectors &vc(“ABI &vcBoard”) &vcand &vccertain &vcABI &vcBoard &vccommittees. &vcThrough
&vcthis &vcrepresentation, &vcAltria &vcparticipates &vcin &vcABI &vcpolicy &vcmaking &vcprocesses.” &vcA
&vcclassification &vcof &vc“significant &vcinfluence” &vcseems &vcmost &vcappropriate &vcgiven &vcthe
&vcfacts, &vcand &vcthis &vcclassification &vcwarrants &vcaccounting &vcfor &vcthe &vcinvestment &vcusing
&vcthe &vcequity &vcmethod &vcof &vcaccounting.
5. a. An &vcinvestor &vcmay &vcwrite &vcdown &vcthe &vccarrying &vcamount &vcof &vcits &vcEquity
&vc
&vcInvestment &vcif &vcthe &vcfair &vcvalue &vcof &vcthat &vcinvestment &vchas &vcdeclined &vcbelow
&vcits &vccarrying &vcvalue &vcand &vcthat &vcdecline &vcis &vcdeemed &vcto &vcbe &vcother &vcthan
&vctemporary.
b. There &vcis &vcconsiderable &vcjudgment &vcin &vcdetermining &vcwhether &vca &vcdecline &vcin &vcfair
&vcvalue &vcis &vcother &vcthan &vctemporary. &vcThe &vcwrite-down &vcamounts &vcto &vca &vcprediction
&vcthat &vcthe &vcfuture &vcfair &vcvalue &vcof &vcthe &vcinvestment &vcwill &vcnot &vcrise &vcabove &vcthe
&vccurrent &vccarrying &vcamount. &vcIf &vca &vccompany &vcdeems &vcthe &vcdecline &vcto &vcbe
&vctemporary, &vcit &vcdoes &vcnot &vcwrite &vcdown &vcthe &vcinvestment, &vcand &vca &vcloss &vcis &vcnot
&vcrecognized &vcin &vcits &vcincome &vcstatement. &vcIf &vcthe &vcdecline &vcis &vcdeemed &vcto &vcbe
&vcother &vcthan &vctemporary, &vcthe &vcinvestment &vcis &vcwritten &vcdown &vcand &vca &vcloss &vcis
&vcreported. &vcCompanies &vccan &vcuse &vcthis &vcflexibility &vcto &vcdecide &vcwhether &vcto
&vcrecognize &vca &vcloss &vcin &vcthe &vccurrent &vcyear &vcor &vcto &vcpostpone &vcit &vcto &vca &vcfuture
&vcyear.
6. Under &vcthe &vcequity &vcmethod, &vcan &vcinvestor &vcrecognizes &vcits &vcshare &vcof &vcthe &vcearnings
&vcor &vclosses &vcof &vcan &vcinvestee &vcin &vcthe &vcperiods &vcfor &vcwhich &vcthey &vcare &vcreported &vcby
&vcthe &vcinvestee &vcin &vcits &vcfinancial &vcstatements. &vcFASB &vcASC &vc323-10-35-7 &vcstates
&vcthat &vc“Intra-entity &vcprofits &vcand &vclosses &vcshall &vcbe &vceliminated &vcuntil &vcrealized &vcby
&vcthe &vcinvestor &vcor &vcinvestee &vcas &vcif &vcthe &vcinvestee &vcwere &vcconsolidated.” &vcThese
&vcintercompany &vcitems &vcare &vceliminated &vcto &vcavoid &vcdouble &vccounting &vcand
&vcprematurely &vcrecognizing &vcincome.
TestBanksAdept
, 2023
1-2 Advanced &vcAccounting, &vc5th &vcEdition
TestBanksAdept
&vc
5th Edition
&vc
by Patrick Hopkins and Halsey
&vc &vc &vc &vc
TestBanksAdept
, Advanced Accounting
Fifth Edition
By Patrick E. Hopkins and Robert F. Halsey
Solution Manual
Chapter 1— Accounting for Intercorporate Investments
1. a. If the investor acquired 100% of the investee at book value, the Equity Investment
account is equal to the Stockholders’ Equity of the investee company. It, therefore,
includes the assets and liabilities of the investee company in one account. The
investor’s balance sheet, therefore, includes the Stockholders’ Equity of the investee
company, and, implicitly, its assets and liabilities. In the consolidation process, the
balance sheets of the investor and investee company are brought together.
Consolidated Stockholders’ Equity will be the same as that which the investor
currently reports; only total assets and total liabilities will change.
b. If the investor owns 100% of the investee, the equity income that the investor reports
is equal to the net income of the investee, thus implicitly including its revenues and
expenses. Replacing the equity income with the revenues and expenses of the
investee company in the consolidation process will yield the same net income.
2. FASB ASC 323-10 provides the following guidance with respect to the accounting for
receipt of dividends using the equity method:
The equity method tends to be most appropriate if an investment enables the
investor to influence the operating or financial decisions of the investee. The
investor then has a degree of responsibility for the return on its investment, and
it is appropriate to include in the results of operations of the investor its share of
the earnings or losses of the investee. (¶323-10-05-5)
The equity method is an appropriate means of recognizing increases or decreases
measured by generally accepted accounting principles (GAAP) in the economic resources
underlying the investments. Furthermore, the equity method of accounting more closely
meets the objectives of accrual accounting than does the cost method because the
investor recognizes its share of the earnings and losses of the investee in the periods in
which they are reflected in the accounts of the investee. (¶323-10-05-4)
Under the equity method, an investor shall recognize its share of the earnings or losses
of an investee in the periods for which they are reported by the investee in its financial
statements rather than in the period in which an investee declares a dividend (¶323-10-
35-4).
TestBanksAdept
,3. The &vcrecognition &vcof &vcequity &vcincome &vcdoes &vcnot &vcmean &vcthat &vccash &vchas &vcbeen
&vcreceived. &vcIn &vcfact, &vcdividends &vcpaid &vcby &vcthe &vcinvestee &vcto &vcthe &vcinvestor &vcare
&vctypically &vca &vcsmall &vcpercentage &vcof &vcits &vcreported &vcnet &vcincome. &vcThe &vcprojection &vcof
&vcfuture &vcnet &vcincome &vcthat &vcincludes &vcequity &vcincome &vcas &vca &vcsignificant &vccomponent
&vcmight &vcnot, &vctherefore, &vcimply &vcsignificant &vcgeneration &vcof &vccash.
4. The &vcaccounting &vcfor &vcAltria’s &vcinvestment &vcin &vcABI &vcdepends &vcon &vcthe &vcdegree &vcof
&vcinfluence &vcor &vccontrol &vcit &vccan &vcexert &vcover &vcthat &vccompany. &vcA &vcclassification &vcof &vc“no
&vcinfluence” &vcdoes &vcnot &vcappear &vcappropriate &vcsince &vcAltria &vcowns &vc10.1% &vcof &vcthe
&vcoutstanding &vccommon &vcstock &vcand &vcalso &vc“active &vcrepresentation &vcon &vcABI’s &vcBoard
&vcof &vcDirectors &vc(“ABI &vcBoard”) &vcand &vccertain &vcABI &vcBoard &vccommittees. &vcThrough
&vcthis &vcrepresentation, &vcAltria &vcparticipates &vcin &vcABI &vcpolicy &vcmaking &vcprocesses.” &vcA
&vcclassification &vcof &vc“significant &vcinfluence” &vcseems &vcmost &vcappropriate &vcgiven &vcthe
&vcfacts, &vcand &vcthis &vcclassification &vcwarrants &vcaccounting &vcfor &vcthe &vcinvestment &vcusing
&vcthe &vcequity &vcmethod &vcof &vcaccounting.
5. a. An &vcinvestor &vcmay &vcwrite &vcdown &vcthe &vccarrying &vcamount &vcof &vcits &vcEquity
&vc
&vcInvestment &vcif &vcthe &vcfair &vcvalue &vcof &vcthat &vcinvestment &vchas &vcdeclined &vcbelow
&vcits &vccarrying &vcvalue &vcand &vcthat &vcdecline &vcis &vcdeemed &vcto &vcbe &vcother &vcthan
&vctemporary.
b. There &vcis &vcconsiderable &vcjudgment &vcin &vcdetermining &vcwhether &vca &vcdecline &vcin &vcfair
&vcvalue &vcis &vcother &vcthan &vctemporary. &vcThe &vcwrite-down &vcamounts &vcto &vca &vcprediction
&vcthat &vcthe &vcfuture &vcfair &vcvalue &vcof &vcthe &vcinvestment &vcwill &vcnot &vcrise &vcabove &vcthe
&vccurrent &vccarrying &vcamount. &vcIf &vca &vccompany &vcdeems &vcthe &vcdecline &vcto &vcbe
&vctemporary, &vcit &vcdoes &vcnot &vcwrite &vcdown &vcthe &vcinvestment, &vcand &vca &vcloss &vcis &vcnot
&vcrecognized &vcin &vcits &vcincome &vcstatement. &vcIf &vcthe &vcdecline &vcis &vcdeemed &vcto &vcbe
&vcother &vcthan &vctemporary, &vcthe &vcinvestment &vcis &vcwritten &vcdown &vcand &vca &vcloss &vcis
&vcreported. &vcCompanies &vccan &vcuse &vcthis &vcflexibility &vcto &vcdecide &vcwhether &vcto
&vcrecognize &vca &vcloss &vcin &vcthe &vccurrent &vcyear &vcor &vcto &vcpostpone &vcit &vcto &vca &vcfuture
&vcyear.
6. Under &vcthe &vcequity &vcmethod, &vcan &vcinvestor &vcrecognizes &vcits &vcshare &vcof &vcthe &vcearnings
&vcor &vclosses &vcof &vcan &vcinvestee &vcin &vcthe &vcperiods &vcfor &vcwhich &vcthey &vcare &vcreported &vcby
&vcthe &vcinvestee &vcin &vcits &vcfinancial &vcstatements. &vcFASB &vcASC &vc323-10-35-7 &vcstates
&vcthat &vc“Intra-entity &vcprofits &vcand &vclosses &vcshall &vcbe &vceliminated &vcuntil &vcrealized &vcby
&vcthe &vcinvestor &vcor &vcinvestee &vcas &vcif &vcthe &vcinvestee &vcwere &vcconsolidated.” &vcThese
&vcintercompany &vcitems &vcare &vceliminated &vcto &vcavoid &vcdouble &vccounting &vcand
&vcprematurely &vcrecognizing &vcincome.
TestBanksAdept
, 2023
1-2 Advanced &vcAccounting, &vc5th &vcEdition
TestBanksAdept
