2-1
© McGrawxHill LLC. All rights reserved. No reproduction or distribution without the prior written consentxof McGrawxHill LLC.
,SOLUTION MANUAL FOR wq wq
ADVANCEDwqACCOUNTINGwq15THwqEDITIONwqBYwqJOEwqBENwqHOYLE,wqTHOMASwqSCH
AEFEwqR ANDwqTIMOTHYwqDOUPNIK
x
CHAPTERwq1-19
CHAPTER1 TH wq w
q EEQUITYMETHODOFACCOUNTINGFORINVESTMENTS
ChapterwqOutline
I. Fourwqmethodswqarewqprincipallywqusedwqto accountwqforwqanwqinvestmentwqinwqequitywqsecuritie
x
swqalongwqwiwqthwqawqfairwqvaluewqoption.
A. Fairwqvaluewqmethod:wqappliedwqbywqanwqinvestorwqwhenwqonlywqawqsmallwqpercenta
gewqofwqawqcowqmpany‘swqvotingwqstock iswqheld. x
1. Thewqinvestorwqrecognizeswqincomewqwhenwqthewqinvesteewqdeclareswqawqdividend.
2. Portfolioswqarewqreportedwqat fairwqvalue.wqIfwqfairwqvalueswqarewqunavailable,wqinvest
x
mentwqiswqrewqportedwqat cost.
x
B. Cost Method:wqappliedwqtowqinvestmentswqwithoutwqawqreadilywqdeterminablewqfairwqvalue.wq
x
Whenwqthwqewqfairwqvaluewqofwqanwqinvestment inwqequitywqsecurities iswqnotwqreadilywqdeter
x x
minable,wqandwqthewqinvewqstmentwqprovideswqneitherwqsignificant influence norwqcontrol,wqt
x x
hewqinvestment maywqbewqmeasurwqedwqat cost.wqThewqinvestmentwqremainswqat cost unle
x x x x
ss
1. A demonstrablewqimpairmentwqoccurs forwqthewqinvestment,wqor
x x
2. Anwqobservablewqpricewqchangewqoccurswqforwqidenticalwqorwqsimilarwqinvestmentswqofwqth
ewqsamewqiswqsuer.
Thewqinvestorwqtypicallywqrecognizes its sharewqofwqinvesteewqdividendswqdeclaredwqaswqdivid
x x
endwqincwqome.
C. Consolidation:wqwhenwqone firmwqcontrols anotherwq(e.g.,wqwhenwqawqparent haswqawqmaj
x x x
oritywqintewqrest inwqthewqvotingwqstockwqofwqawqsubsidiarywqorwqcontrolwqthroughwqvariablewqi
x
nterests,wqtheirwqfinancwqialwqstatementswqarewqconsolidatedwqandwqreportedwqforwqthewq
combinedwqentity.
D. Equitywqmethod:wqappliedwqwhenwqthewqinvestorwqhaswqthe abilitywqtowqexercisewqsign
x
ificantwqinwqfluencewqoverwqoperatingwqandwqfinancialwqpolicieswqofwqthewqinvestee.
1. Abilitywqto significantlywqinfluencewqinvesteewqiswqindicatedwqbywqseveralwqfactors incl
x x
udingwqrwqepresentationwqonwqthe boardwqofwqdirectors,wqparticipationwqinwqpolicy-
x
making,wqetc.
2. GAAPwqguidelineswqpresumewqthewqequitywqmethodwqiswqapplicablewqifwq20wqto 50 percentwqofwqthe x x
2-1
©wqMcGrawxHillwqLLC.wqAllwqrightswq reserved.wq Nowqreproductionwq orwqdistributionwqwithoutwq thewqpriorwqwrittenwqconsen
t ofwqMcGraw HillwqLLC.
, outstandingwqvotingwqstockwqofwqthewqinvesteewqiswqheldwqbywqthewqinvestor.
Currentwqfinancialwqreportingwqstandardswqallowwqfirmswqtowqelect towquse fairwqvaluewqforwqanywq x x
newwqinvestwqment inwqequitywqshareswqincludingwqthosewqwherewqthewqequitywqmethodwqwouldwqo
x
therwisewqapply.wqHowewqver,wqthewqoption,wqoncewqtaken,wqiswqirrevocable.wqThewqinvestorwqrec
ognizeswqbothwqinvesteewqdividendswqandwqchangeswqinwqfairwqvaluewqoverwqtime aswqincome. x
II. Accountingwqforwqanwqinvestment:wqthewqequitywqmethod
A. Thewqinvestorwqadjustswqthe investmentwqaccountwqtowqreflect allwqchangeswqinwqthewqequity
x x
wqofwqthe inwqvestee company.
x x
B. Thewqinvestorwqaccrueswqinvesteewqincomewqwhenwqitwqiswqreportedwqinwqthewqinvestee‘swq
financialwqstwqatements.
C. Dividendswqdeclaredwqbywqthe investeewqcreatewqawqreductionwqinwqthewqcarryingwqamount of
x x
wqthewqInvewqstmentwqaccount.wqThiswqbookwqassumeswqallwqinvesteewqdividendswqarewqdecl
aredwqandwqpaidwqinwqthewqsamewqreportingwqperiod.
III. Specialwqaccountingwqprocedureswqusedwqinwqthewqapplicationwqofwqthewqequitywqmethod
A. Reportingwqawqchangewqtowqthewqequitywqmethodwqwhenwqthe abilitywqtowqsignificantlywqinflue x
ncewqanwqinwqvestee is achievedwqthroughwqawqserieswqofwqacquisitions.
x x
1. Initialwqpurchase(s)wqwillwqbewqaccountedwqforwqbywqmeans ofwqthewqfairwqvaluewqmetho x
dwq(orwqat cowqst)wquntilwqthewqabilitywqto significantlywqinfluence iswqattained.
x x x
2. Whenwqthewqabilitywqtowqexercisewqsignificantwqinfluencewqoccurswqfollowingwqawqserieswq
ofwqstock pwqurchases,wqthewqinvestorwqapplies thewqequitywqmethodwqprospectively.wqT
x x
hewqtotalwqfairwqvaluewqawqtwqthe datewqsignificantwqinfluencewqiswqattainedwqiswqcompare
x
dwqto thewqinvestee‘swqbookwqvaluewqtwqowqdeterminewqfuturewqexcess fairwqvaluewqamo
x x
rtizations.
B. Investeewqincomewqfromwqotherwqthanwqcontinuingwqoperations
1. Thewqinvestorwqrecognizeswqitswqsharewqofwqinvesteewqreportedwqotherwqcomprehe
nsivewqinwqcomewq(OCI)wqthroughwqthe investmentwqaccount andwqthewqinvestor x x
‘swqownwqOCI.
2. Incomewqitemswqsuchwqaswqdiscontinuedwqoperations thatwqarewqreportedwqseparatelywqb x
ywqthe inwqvestee shouldwqbewqshownwqinwqthewqsamewqmannerwqbywqthewqinvestor.wqThew
x x
qmaterialitywqofwqtheswqewqotherwqinvesteewqincomewqelementswq(aswqitwqaffectswqthewqinv
estor)wqcontinueswqtowqbewqawqcriteriwqonwqforwqseparatewqdisclosure.
C. Investeewqlosses
1. Losseswqreportedwqbywqthewqinvesteewqcreate correspondingwqlosseswqforwqthewqinvestor. x
2. A permanentwqdecline inwqthe fairwqvaluewqofwqanwqinvestee‘swqstock shouldwqbewqrecog
x x x x
nizedwqimwqmediatelywqbywqthewqinvestorwqaswqanwqimpairment loss. x
3. Investee losseswqcanwqpossiblywqreducewqthe carryingwqvaluewqofwqthe investmentwqac
x x x
count to w q awqzero balance.wqAtwqthatwqpoint,wqthewqequitywqmethodwqceaseswqtowqbewqa
x x x
pplicablewqandwqthe fair-wqvaluewqmethodwqiswqsubsequentlywqused.
x
D. Reportingwqthewqsalewqofwqanwqequitywqinvestment
1. Thewqinvestorwqapplieswqthewqequitywqmethodwquntilwqthewqdisposalwqdatewqtowqestablishwqaw
qproperwqbowqokwqvalue.
2. Followingwqthewqsale,wqthewqequitywqmethodwqcontinueswqtowqbewqappropriatewqifwqenoughwq
shareswqarwqewqstillwqheldwqtowqmaintainwqthewqinvestor‘swqabilitywqtowqsignificantlywqinfluen
ce thewqinvestee.wqIfwqthwqat abilitywqhaswqbeenwqlost,wqthewqfair-
x x
valuewqmethodwqiswqsubsequentlywqused.
, 2-24
©wqMcGrawxHillwqLLC.wqAllwqrightsxreserved.wq Nowqreproductionwqorwqdistributionwqwithoutwq thewqpriorwqwrittenwqconsentxofwqMcGrawwqHillwqLLC
.
© McGrawxHill LLC. All rights reserved. No reproduction or distribution without the prior written consentxof McGrawxHill LLC.
,SOLUTION MANUAL FOR wq wq
ADVANCEDwqACCOUNTINGwq15THwqEDITIONwqBYwqJOEwqBENwqHOYLE,wqTHOMASwqSCH
AEFEwqR ANDwqTIMOTHYwqDOUPNIK
x
CHAPTERwq1-19
CHAPTER1 TH wq w
q EEQUITYMETHODOFACCOUNTINGFORINVESTMENTS
ChapterwqOutline
I. Fourwqmethodswqarewqprincipallywqusedwqto accountwqforwqanwqinvestmentwqinwqequitywqsecuritie
x
swqalongwqwiwqthwqawqfairwqvaluewqoption.
A. Fairwqvaluewqmethod:wqappliedwqbywqanwqinvestorwqwhenwqonlywqawqsmallwqpercenta
gewqofwqawqcowqmpany‘swqvotingwqstock iswqheld. x
1. Thewqinvestorwqrecognizeswqincomewqwhenwqthewqinvesteewqdeclareswqawqdividend.
2. Portfolioswqarewqreportedwqat fairwqvalue.wqIfwqfairwqvalueswqarewqunavailable,wqinvest
x
mentwqiswqrewqportedwqat cost.
x
B. Cost Method:wqappliedwqtowqinvestmentswqwithoutwqawqreadilywqdeterminablewqfairwqvalue.wq
x
Whenwqthwqewqfairwqvaluewqofwqanwqinvestment inwqequitywqsecurities iswqnotwqreadilywqdeter
x x
minable,wqandwqthewqinvewqstmentwqprovideswqneitherwqsignificant influence norwqcontrol,wqt
x x
hewqinvestment maywqbewqmeasurwqedwqat cost.wqThewqinvestmentwqremainswqat cost unle
x x x x
ss
1. A demonstrablewqimpairmentwqoccurs forwqthewqinvestment,wqor
x x
2. Anwqobservablewqpricewqchangewqoccurswqforwqidenticalwqorwqsimilarwqinvestmentswqofwqth
ewqsamewqiswqsuer.
Thewqinvestorwqtypicallywqrecognizes its sharewqofwqinvesteewqdividendswqdeclaredwqaswqdivid
x x
endwqincwqome.
C. Consolidation:wqwhenwqone firmwqcontrols anotherwq(e.g.,wqwhenwqawqparent haswqawqmaj
x x x
oritywqintewqrest inwqthewqvotingwqstockwqofwqawqsubsidiarywqorwqcontrolwqthroughwqvariablewqi
x
nterests,wqtheirwqfinancwqialwqstatementswqarewqconsolidatedwqandwqreportedwqforwqthewq
combinedwqentity.
D. Equitywqmethod:wqappliedwqwhenwqthewqinvestorwqhaswqthe abilitywqtowqexercisewqsign
x
ificantwqinwqfluencewqoverwqoperatingwqandwqfinancialwqpolicieswqofwqthewqinvestee.
1. Abilitywqto significantlywqinfluencewqinvesteewqiswqindicatedwqbywqseveralwqfactors incl
x x
udingwqrwqepresentationwqonwqthe boardwqofwqdirectors,wqparticipationwqinwqpolicy-
x
making,wqetc.
2. GAAPwqguidelineswqpresumewqthewqequitywqmethodwqiswqapplicablewqifwq20wqto 50 percentwqofwqthe x x
2-1
©wqMcGrawxHillwqLLC.wqAllwqrightswq reserved.wq Nowqreproductionwq orwqdistributionwqwithoutwq thewqpriorwqwrittenwqconsen
t ofwqMcGraw HillwqLLC.
, outstandingwqvotingwqstockwqofwqthewqinvesteewqiswqheldwqbywqthewqinvestor.
Currentwqfinancialwqreportingwqstandardswqallowwqfirmswqtowqelect towquse fairwqvaluewqforwqanywq x x
newwqinvestwqment inwqequitywqshareswqincludingwqthosewqwherewqthewqequitywqmethodwqwouldwqo
x
therwisewqapply.wqHowewqver,wqthewqoption,wqoncewqtaken,wqiswqirrevocable.wqThewqinvestorwqrec
ognizeswqbothwqinvesteewqdividendswqandwqchangeswqinwqfairwqvaluewqoverwqtime aswqincome. x
II. Accountingwqforwqanwqinvestment:wqthewqequitywqmethod
A. Thewqinvestorwqadjustswqthe investmentwqaccountwqtowqreflect allwqchangeswqinwqthewqequity
x x
wqofwqthe inwqvestee company.
x x
B. Thewqinvestorwqaccrueswqinvesteewqincomewqwhenwqitwqiswqreportedwqinwqthewqinvestee‘swq
financialwqstwqatements.
C. Dividendswqdeclaredwqbywqthe investeewqcreatewqawqreductionwqinwqthewqcarryingwqamount of
x x
wqthewqInvewqstmentwqaccount.wqThiswqbookwqassumeswqallwqinvesteewqdividendswqarewqdecl
aredwqandwqpaidwqinwqthewqsamewqreportingwqperiod.
III. Specialwqaccountingwqprocedureswqusedwqinwqthewqapplicationwqofwqthewqequitywqmethod
A. Reportingwqawqchangewqtowqthewqequitywqmethodwqwhenwqthe abilitywqtowqsignificantlywqinflue x
ncewqanwqinwqvestee is achievedwqthroughwqawqserieswqofwqacquisitions.
x x
1. Initialwqpurchase(s)wqwillwqbewqaccountedwqforwqbywqmeans ofwqthewqfairwqvaluewqmetho x
dwq(orwqat cowqst)wquntilwqthewqabilitywqto significantlywqinfluence iswqattained.
x x x
2. Whenwqthewqabilitywqtowqexercisewqsignificantwqinfluencewqoccurswqfollowingwqawqserieswq
ofwqstock pwqurchases,wqthewqinvestorwqapplies thewqequitywqmethodwqprospectively.wqT
x x
hewqtotalwqfairwqvaluewqawqtwqthe datewqsignificantwqinfluencewqiswqattainedwqiswqcompare
x
dwqto thewqinvestee‘swqbookwqvaluewqtwqowqdeterminewqfuturewqexcess fairwqvaluewqamo
x x
rtizations.
B. Investeewqincomewqfromwqotherwqthanwqcontinuingwqoperations
1. Thewqinvestorwqrecognizeswqitswqsharewqofwqinvesteewqreportedwqotherwqcomprehe
nsivewqinwqcomewq(OCI)wqthroughwqthe investmentwqaccount andwqthewqinvestor x x
‘swqownwqOCI.
2. Incomewqitemswqsuchwqaswqdiscontinuedwqoperations thatwqarewqreportedwqseparatelywqb x
ywqthe inwqvestee shouldwqbewqshownwqinwqthewqsamewqmannerwqbywqthewqinvestor.wqThew
x x
qmaterialitywqofwqtheswqewqotherwqinvesteewqincomewqelementswq(aswqitwqaffectswqthewqinv
estor)wqcontinueswqtowqbewqawqcriteriwqonwqforwqseparatewqdisclosure.
C. Investeewqlosses
1. Losseswqreportedwqbywqthewqinvesteewqcreate correspondingwqlosseswqforwqthewqinvestor. x
2. A permanentwqdecline inwqthe fairwqvaluewqofwqanwqinvestee‘swqstock shouldwqbewqrecog
x x x x
nizedwqimwqmediatelywqbywqthewqinvestorwqaswqanwqimpairment loss. x
3. Investee losseswqcanwqpossiblywqreducewqthe carryingwqvaluewqofwqthe investmentwqac
x x x
count to w q awqzero balance.wqAtwqthatwqpoint,wqthewqequitywqmethodwqceaseswqtowqbewqa
x x x
pplicablewqandwqthe fair-wqvaluewqmethodwqiswqsubsequentlywqused.
x
D. Reportingwqthewqsalewqofwqanwqequitywqinvestment
1. Thewqinvestorwqapplieswqthewqequitywqmethodwquntilwqthewqdisposalwqdatewqtowqestablishwqaw
qproperwqbowqokwqvalue.
2. Followingwqthewqsale,wqthewqequitywqmethodwqcontinueswqtowqbewqappropriatewqifwqenoughwq
shareswqarwqewqstillwqheldwqtowqmaintainwqthewqinvestor‘swqabilitywqtowqsignificantlywqinfluen
ce thewqinvestee.wqIfwqthwqat abilitywqhaswqbeenwqlost,wqthewqfair-
x x
valuewqmethodwqiswqsubsequentlywqused.
, 2-24
©wqMcGrawxHillwqLLC.wqAllwqrightsxreserved.wq Nowqreproductionwqorwqdistributionwqwithoutwq thewqpriorwqwrittenwqconsentxofwqMcGrawwqHillwqLLC
.
