Solution Manual For All Chapters
SOLUTION MANUAL FOR
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS
SCHAEFER AND TIMOTHY DOUPNIK
CHAPTER 1-19
CHAPTER 1
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
Chapter Outline
I. Four methods are principally used to account for an investment in equity securities along
with a fair value option.
A. Fair value method: applied by an investor when only a small percentage of a
company‘s voting stock is held.
1. The investor recognizes income when the investee declares a dividend.
2. Portfolios are reported at fair value. If fair values are unavailable, investment is
reported at cost.
B. Cost Method: applied to investments without a readily determinable fair value. When
the fair value of an investment in equity securities is not readily determinable, and the
investment provides neither significant influence nor control, the investment may be
measured at cost. The investment remains at cost unless
1. A demonstrable impairment occurs for the investment, or
2. An observable price change occurs for identical or similar investments of the same
issuer.
The investor typically recognizes its share of investee dividends declared as dividend
income.
C. Consolidation: when one firm controls another (e.g., when a parent has a majority
interest in the voting stock of a subsidiary or control through variable interests, their
financial statements are consolidated and reported for the combined entity.
D. Equity method: applied when the investor has the ability to exercise significant
influence over operating and financial policies of the investee.
1. Ability to significantly influence investee is indicated by several factors including
representation on the board of directors, participation in policy-making, etc.
2. 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 without the prior written consent of McGraw Hill 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
investment in equity shares including those where the equity method would otherwise
apply. However, the option, once taken, is irrevocable. The investor recognizes both
investee dividends and changes in fair value over time as income.
II. Accounting for an investment: the equity method
A. The investor adjusts the investment account to reflect all changes in the equity of the
investee company.
B. The investor accrues investee income when it is reported in the investee‘s financial
statements.
C. Dividends declared by the investee create a reduction in the carrying amount of the
Investment 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 an
investee is achieved through a series of acquisitions.
1. Initial purchase(s) will be accounted for by means of the fair value method (or at
cost) until the ability to significantly influence is attained.
2. When the ability to exercise significant influence occurs following a series of stock
purchases, the investor applies the equity method prospectively. The total fair
value at the date significant influence is attained is compared to the investee‘s
book value to determine future excess fair value amortizations.
B. Investee income from other than continuing operations
1. The investor recognizes its share of investee reported other comprehensive
income (OCI) through the investment account and the investor‘s own OCI.
2. Income items such as discontinued operations that are reported separately by the
investee should be shown in the same manner by the investor. The materiality of
these other investee income elements (as it affects the investor) continues to be a
criterion for separate disclosure.
C. Investee losses
1. Losses reported by the investee create corresponding losses for the investor.
2. A permanent decline in the fair value of an investee‘s stock should be recognized
immediately by the investor as an impairment loss.
3. Investee losses can possibly reduce the carrying value of the investment account
to a zero balance. At that point, the equity method ceases to be applicable and the
fair-value method is subsequently used.
D. Reporting the sale of an equity investment
1. The investor applies the equity method until the disposal date to establish a proper
book value.
2. Following the sale, the equity method continues to be appropriate if enough shares
are still held to maintain the investor‘s ability to significantly influence the investee.
If that ability has been lost, the fair-value method is subsequently used.
2-24
©s4McGraws4Hills4LLC.s4Alls4rightss4reserved.s4Nos4reproductions4ors4distributions4withouts4thes4priors4writtens4con
sents4ofs4McGraws4Hills4LLC.
,Solutions4Manuals4Fors4Alls4Chapters
IV. Excesss4investments4costs4overs4books4values4acquired
A. Thes4prices4ans4investors4payss4fors4equitys4securitiess4oftens4differss4significan
tlys4froms4thes4investee‘ss4underlyings4books4values4primarilys4becauses4thes4hi
storicals4costs4baseds4accountings4models4doess4nots4keeps4tracks4ofs4changes
s4ins4as4firm‘ss4fairs4value.
B. Paymentss4mades4ins4excesss4ofs4underlyings4books4values4cans4sometimess4bes4id
entifieds4withs4specifics4investees4accountss4suchs4ass4inventorys4ors4equipment.
C. Ans4extras4acquisitions4prices4cans4alsos4bes4assigneds4tos4anticipateds4benefitss4th
ats4ares4expecteds4tos4bes4deriveds4froms4thes4investment.s4Ins4accounting,s4theses
4amountss4ares4presumeds4tos4reflects4ans4intangibles4assets4referreds4tos4ass4good
will.s4Goodwills4iss4calculateds4ass4anys4excesss4payments4thats4iss4nots4attributabl
es4tos4specifics4identifiables4assetss4ands4liabilitiess4ofs4thes4investee.s4Becauses4g
oodwills4iss4ans4indefinite-liveds4asset,s4its4iss4nots4amortized.
V. Deferrals4ofs4intra-entitys4grosss4profits4ins4inventory
A. Thes4investor‘ss4shares4ofs4intra-
entitys4profitss4ins4endings4inventorys4ares4nots4recognizeds4untils4thes4transferreds4g
oodss4ares4eithers4consumeds4ors4untils4theys4ares4resolds4tos4unrelateds4parties.
B. Downstreams4saless4ofs4inventory
1. ―Downstream‖s4referss4tos4transferss4mades4bys4thes4investors4tos4thes4investee.
2. Intra-
entitys4grosss4profitss4froms4saless4ares4initiallys4deferreds4unders4thes4equitys4
methods4ands4thens4recognizeds4ass4incomes4ats4thes4times4ofs4thes4inventory‘
ss4eventuals4disposal.
3. Thes4amounts4ofs4grosss4profits4tos4bes4deferreds4iss4thes4investor‘ss4ownership
s4percentages4multiplieds4bys4thes4markups4ons4thes4merchandises4remainings4
ats4thes4ends4ofs4thes4year.
C. Upstreams4saless4ofs4inventory
1. ―Upstream‖s4referss4tos4transferss4mades4bys4thes4investees4tos4thes4investor.
2. Unders4thes4equitys4method,s4thes4deferrals4processs4fors4intra-
entitys4grosss4profitss4iss4identicals4fors4upstreams4ands4downstreams4transfers.s
4Thes4proceduress4ares4separatelys4identifieds4ins4Chapters4Ones4becauses4thes
4handlings4doess4varys4withins4thes4consolidations4process.
Answerss4tos4Discussions4Questions
Thes4textbooks4includess4discussions4questionss4tos4stimulates4students4thoughts4ands4discussi
on.s4Theses4questionss4ares4alsos4designeds4tos4allows4studentss4tos4considers4relevants4issues
s4thats4mights4otherwises4bes4overlooked.s4Somes4ofs4theses4questionss4mays4bes4addresseds4
bys4thes4instructors4ins4classs4tos4motivates4students4discussion.s4Studentss4shoulds4bes4encour
ageds4tos4begins4bys4definings4thes4issue(s)s4ins4eachs4case.s4Next,s4authoritatives4accountings4
literatures4(FASBs4ASC)s4ors4others4relevants4literatures4cans4bes4consulteds4ass4as4preliminarys
4steps4ins4arrivings4ats4logicals4actions.s4Frequently,s4thes4FASBs4Accountings4Standardss4Codif
ications4wills4provides4thes4necessarys4support.
Unfortunately,s4ins4accounting,s4definitives4resolutionss4tos4financials4reportings4questionss4ares4
nots4alwayss4available.s4Studentss4oftens4seems4tos4believes4thats4alls4accountings4issuess4hav
es4beens4resolveds4ins4thes4pasts4sos4thats4accountings4educations4iss4onlys4as4matters4ofs4lear
nings4tos4applys4historicallys4prescribeds4procedures.s4However,s4ins4actuals4practice,s4thes4only
s4reals4answers4iss4oftens4thes4ones4thats4providess4thes4fairests4representations4ofs4thes4firm‘ss
4transactions.s4Ifs4ans4authoritatives4solutions4iss4nots4available,s4studentss4shoulds4bes4directed
s4tos4lists4alls4ofs4thes4issuess4involveds4ands4thes4consequencess4ofs4possibles4alternatives4acti
ons.s4Thes4variouss4factorss4presenteds4cans4bes4weigheds4tos4produces4as4viables4solution.
2-3
©s4McGraws4Hills4LLC.s4Alls4rightss4reserved.s4Nos4reproductions4ors4distributions4withouts4thes4priors4writtens4con
sents4ofs4McGraws4Hills4LLC.
, Thes4discussions4questionss4ares4designeds4tos4helps4studentss4develops4researchs4ands4critical
s4thinkings4skillss4ins4addressings4issuess4thats4gos4beyonds4thes4purelys4mechanicals4elements
s4ofs4accounting.
2-3
©s4McGraws4Hills4LLC.s4Alls4rightss4reserved.s4Nos4reproductions4ors4distributions4withouts4thes4priors4writtens4con
sents4ofs4McGraws4Hills4LLC.
SOLUTION MANUAL FOR
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS
SCHAEFER AND TIMOTHY DOUPNIK
CHAPTER 1-19
CHAPTER 1
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
Chapter Outline
I. Four methods are principally used to account for an investment in equity securities along
with a fair value option.
A. Fair value method: applied by an investor when only a small percentage of a
company‘s voting stock is held.
1. The investor recognizes income when the investee declares a dividend.
2. Portfolios are reported at fair value. If fair values are unavailable, investment is
reported at cost.
B. Cost Method: applied to investments without a readily determinable fair value. When
the fair value of an investment in equity securities is not readily determinable, and the
investment provides neither significant influence nor control, the investment may be
measured at cost. The investment remains at cost unless
1. A demonstrable impairment occurs for the investment, or
2. An observable price change occurs for identical or similar investments of the same
issuer.
The investor typically recognizes its share of investee dividends declared as dividend
income.
C. Consolidation: when one firm controls another (e.g., when a parent has a majority
interest in the voting stock of a subsidiary or control through variable interests, their
financial statements are consolidated and reported for the combined entity.
D. Equity method: applied when the investor has the ability to exercise significant
influence over operating and financial policies of the investee.
1. Ability to significantly influence investee is indicated by several factors including
representation on the board of directors, participation in policy-making, etc.
2. 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 without the prior written consent of McGraw Hill 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
investment in equity shares including those where the equity method would otherwise
apply. However, the option, once taken, is irrevocable. The investor recognizes both
investee dividends and changes in fair value over time as income.
II. Accounting for an investment: the equity method
A. The investor adjusts the investment account to reflect all changes in the equity of the
investee company.
B. The investor accrues investee income when it is reported in the investee‘s financial
statements.
C. Dividends declared by the investee create a reduction in the carrying amount of the
Investment 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 an
investee is achieved through a series of acquisitions.
1. Initial purchase(s) will be accounted for by means of the fair value method (or at
cost) until the ability to significantly influence is attained.
2. When the ability to exercise significant influence occurs following a series of stock
purchases, the investor applies the equity method prospectively. The total fair
value at the date significant influence is attained is compared to the investee‘s
book value to determine future excess fair value amortizations.
B. Investee income from other than continuing operations
1. The investor recognizes its share of investee reported other comprehensive
income (OCI) through the investment account and the investor‘s own OCI.
2. Income items such as discontinued operations that are reported separately by the
investee should be shown in the same manner by the investor. The materiality of
these other investee income elements (as it affects the investor) continues to be a
criterion for separate disclosure.
C. Investee losses
1. Losses reported by the investee create corresponding losses for the investor.
2. A permanent decline in the fair value of an investee‘s stock should be recognized
immediately by the investor as an impairment loss.
3. Investee losses can possibly reduce the carrying value of the investment account
to a zero balance. At that point, the equity method ceases to be applicable and the
fair-value method is subsequently used.
D. Reporting the sale of an equity investment
1. The investor applies the equity method until the disposal date to establish a proper
book value.
2. Following the sale, the equity method continues to be appropriate if enough shares
are still held to maintain the investor‘s ability to significantly influence the investee.
If that ability has been lost, the fair-value method is subsequently used.
2-24
©s4McGraws4Hills4LLC.s4Alls4rightss4reserved.s4Nos4reproductions4ors4distributions4withouts4thes4priors4writtens4con
sents4ofs4McGraws4Hills4LLC.
,Solutions4Manuals4Fors4Alls4Chapters
IV. Excesss4investments4costs4overs4books4values4acquired
A. Thes4prices4ans4investors4payss4fors4equitys4securitiess4oftens4differss4significan
tlys4froms4thes4investee‘ss4underlyings4books4values4primarilys4becauses4thes4hi
storicals4costs4baseds4accountings4models4doess4nots4keeps4tracks4ofs4changes
s4ins4as4firm‘ss4fairs4value.
B. Paymentss4mades4ins4excesss4ofs4underlyings4books4values4cans4sometimess4bes4id
entifieds4withs4specifics4investees4accountss4suchs4ass4inventorys4ors4equipment.
C. Ans4extras4acquisitions4prices4cans4alsos4bes4assigneds4tos4anticipateds4benefitss4th
ats4ares4expecteds4tos4bes4deriveds4froms4thes4investment.s4Ins4accounting,s4theses
4amountss4ares4presumeds4tos4reflects4ans4intangibles4assets4referreds4tos4ass4good
will.s4Goodwills4iss4calculateds4ass4anys4excesss4payments4thats4iss4nots4attributabl
es4tos4specifics4identifiables4assetss4ands4liabilitiess4ofs4thes4investee.s4Becauses4g
oodwills4iss4ans4indefinite-liveds4asset,s4its4iss4nots4amortized.
V. Deferrals4ofs4intra-entitys4grosss4profits4ins4inventory
A. Thes4investor‘ss4shares4ofs4intra-
entitys4profitss4ins4endings4inventorys4ares4nots4recognizeds4untils4thes4transferreds4g
oodss4ares4eithers4consumeds4ors4untils4theys4ares4resolds4tos4unrelateds4parties.
B. Downstreams4saless4ofs4inventory
1. ―Downstream‖s4referss4tos4transferss4mades4bys4thes4investors4tos4thes4investee.
2. Intra-
entitys4grosss4profitss4froms4saless4ares4initiallys4deferreds4unders4thes4equitys4
methods4ands4thens4recognizeds4ass4incomes4ats4thes4times4ofs4thes4inventory‘
ss4eventuals4disposal.
3. Thes4amounts4ofs4grosss4profits4tos4bes4deferreds4iss4thes4investor‘ss4ownership
s4percentages4multiplieds4bys4thes4markups4ons4thes4merchandises4remainings4
ats4thes4ends4ofs4thes4year.
C. Upstreams4saless4ofs4inventory
1. ―Upstream‖s4referss4tos4transferss4mades4bys4thes4investees4tos4thes4investor.
2. Unders4thes4equitys4method,s4thes4deferrals4processs4fors4intra-
entitys4grosss4profitss4iss4identicals4fors4upstreams4ands4downstreams4transfers.s
4Thes4proceduress4ares4separatelys4identifieds4ins4Chapters4Ones4becauses4thes
4handlings4doess4varys4withins4thes4consolidations4process.
Answerss4tos4Discussions4Questions
Thes4textbooks4includess4discussions4questionss4tos4stimulates4students4thoughts4ands4discussi
on.s4Theses4questionss4ares4alsos4designeds4tos4allows4studentss4tos4considers4relevants4issues
s4thats4mights4otherwises4bes4overlooked.s4Somes4ofs4theses4questionss4mays4bes4addresseds4
bys4thes4instructors4ins4classs4tos4motivates4students4discussion.s4Studentss4shoulds4bes4encour
ageds4tos4begins4bys4definings4thes4issue(s)s4ins4eachs4case.s4Next,s4authoritatives4accountings4
literatures4(FASBs4ASC)s4ors4others4relevants4literatures4cans4bes4consulteds4ass4as4preliminarys
4steps4ins4arrivings4ats4logicals4actions.s4Frequently,s4thes4FASBs4Accountings4Standardss4Codif
ications4wills4provides4thes4necessarys4support.
Unfortunately,s4ins4accounting,s4definitives4resolutionss4tos4financials4reportings4questionss4ares4
nots4alwayss4available.s4Studentss4oftens4seems4tos4believes4thats4alls4accountings4issuess4hav
es4beens4resolveds4ins4thes4pasts4sos4thats4accountings4educations4iss4onlys4as4matters4ofs4lear
nings4tos4applys4historicallys4prescribeds4procedures.s4However,s4ins4actuals4practice,s4thes4only
s4reals4answers4iss4oftens4thes4ones4thats4providess4thes4fairests4representations4ofs4thes4firm‘ss
4transactions.s4Ifs4ans4authoritatives4solutions4iss4nots4available,s4studentss4shoulds4bes4directed
s4tos4lists4alls4ofs4thes4issuess4involveds4ands4thes4consequencess4ofs4possibles4alternatives4acti
ons.s4Thes4variouss4factorss4presenteds4cans4bes4weigheds4tos4produces4as4viables4solution.
2-3
©s4McGraws4Hills4LLC.s4Alls4rightss4reserved.s4Nos4reproductions4ors4distributions4withouts4thes4priors4writtens4con
sents4ofs4McGraws4Hills4LLC.
, Thes4discussions4questionss4ares4designeds4tos4helps4studentss4develops4researchs4ands4critical
s4thinkings4skillss4ins4addressings4issuess4thats4gos4beyonds4thes4purelys4mechanicals4elements
s4ofs4accounting.
2-3
©s4McGraws4Hills4LLC.s4Alls4rightss4reserved.s4Nos4reproductions4ors4distributions4withouts4thes4priors4writtens4con
sents4ofs4McGraws4Hills4LLC.
