SOLUTION MANUAL FOR ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAEFER AND TIMOTHY DOUPNIK

SolutionAManualAForAAllAChapters

SOLUTION MANUAL FOR
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS
SCHAEFER AND TIMOTHY DOUPNIK




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,CHAPTER 1-19 A




CHAPTER1 TH
E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS

ChapterAOutline

FourAmethodsAareAprincipallyAusedAtoAaccountAforAanAinvestmentAinAequityAsecuritiesAalongA
withAaAfairAvalueAoption.

FairAvalueAmethod:AappliedAbyAanAinvestorAwhenAonlyAaAsmallApercentageAof
AaAcompany‘sAvotingAstockAisAheld.



TheAinvestorArecognizesAincomeAwhenAtheAinvesteeAdeclaresAaAdividend.

PortfoliosAareAreportedAatAfairAvalue.AIfAfairAvaluesAareAunavailable,Ainvestment
AisAreportedAatAcost.



CostAMethod:AappliedAtoAinvestmentsAwithoutAaAreadilyAdeterminableAfairAvalue.AWhe
nAtAheAfairAvalueAofAanAinvestmentAinAequityAsecuritiesAisAnotAreadilyAdeterminable,Aan
dAtheAiAnvestmentAprovidesAneitherAsignificantAinfluenceAnorAcontrol,AtheAinvestmentA
mayAbeAmAeasuredAatAcost.ATheAinvestmentAremainsAatAcostAunless

AAdemonstrableAimpairmentAoccursAforAtheAinvestment,Aor

AnAobservableApriceAchangeAoccursAforAidenticalAorAsimilarAinvestmentsAofAtheAsam
eAiAssuer.
TheAinvestorAtypicallyArecognizesAitsAshareAofAinvesteeAdividendsAdeclaredAasAdividen
dAiAncome.

Consolidation:AwhenAoneAfirmAcontrolsAanotherA(e.g.,AwhenAaAparentAhasAaAmajority
AinAterestAinAtheAvotingAstockAofAaAsubsidiaryAorAcontrolAthroughAvariableAinterests,Ath

eirAfiAnancialAstatementsAareAconsolidatedAandAreportedAforAtheAcombinedAentity.

EquityAmethod:AappliedAwhenAtheAinvestorAhasAtheAabilityAtoAexerciseAsignifica
ntAinfluenceAoverAoperatingAandAfinancialApoliciesAofAtheAinvestee.

AbilityAtoAsignificantlyAinfluenceAinvesteeAisAindicatedAbyAseveralAfactorsAincludingAr
epresentationAonAtheAboardAofAdirectors,AparticipationAinApolicy-making,Aetc.

GAAPAguidelinesApresumeAtheAequityAmethodAisAapplicableAifA20AtoA50ApercentAofAthe




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, outstandingAvotingAstockAofAtheAinvesteeAisAheldAbyAtheAinvestor.

CurrentAfinancialAreportingAstandardsAallowAfirmsAtoAelectAtoAuseAfairAvalueAforAanyAnewAinv
esAtmentAinAequityAsharesAincludingAthoseAwhereAtheAequityAmethodAwouldAotherwiseAappl
y.AHoAwever,AtheAoption,AonceAtaken,AisAirrevocable.ATheAinvestorArecognizesAbothAinveste
eAdivideAndsAandAchangesAinAfairAvalueAoverAtimeAasAincome.



AccountingAforAanAinvestment:AtheAequityAmethod

TheAinvestorAadjustsAtheAinvestmentAaccountAtoAreflectAallAchangesAinAtheAequityAofAth
eAiAnvesteeAcompany.

TheAinvestorAaccruesAinvesteeAincomeAwhenAitAisAreportedAinAtheAinvestee‘sAfinanc
ialAstatements.

DividendsAdeclaredAbyAtheAinvesteeAcreateAaAreductionAinAtheAcarryingAamountAofAtheA
InAvestmentAaccount.AThisAbookAassumesAallAinvesteeAdividendsAareAdeclaredAandApa
idAinAtheAsameAreportingAperiod.

SpecialAaccountingAproceduresAusedAinAtheAapplicationAofAtheAequityAmethod
ReportingAaAchangeAtoAtheAequityAmethodAwhenAtheAabilityAtoAsignificantlyAinfluenceAa
nAiAnvesteeAisAachievedAthroughAaAseriesAofAacquisitions.
InitialApurchase(s)AwillAbeAaccountedAforAbyAmeansAofAtheAfairAvalueAmethodA(or
AatAcost)AuntilAtheAabilityAtoAsignificantlyAinfluenceAisAattained.

WhenAtheAabilityAtoAexerciseAsignificantAinfluenceAoccursAfollowingAaAseriesAofAstoc
kApurchases,AtheAinvestorAappliesAtheAequityAmethodAprospectively.ATheAtotalAfairA
valuAeAatAtheAdateAsignificantAinfluenceAisAattainedAisAcomparedAtoAtheAinvestee‘sAb
ookAvaAlueAtoAdetermineAfutureAexcessAfairAvalueAamortizations.
InvesteeAincomeAfromAotherAthanAcontinuingAoperations
TheAinvestorArecognizesAitsAshareAofAinvesteeAreportedAotherAcomprehensiveAi
ncomeA(OCI)AthroughAtheAinvestmentAaccountAandAtheAinvestor‘sAownAOCI.
IncomeAitemsAsuchAasAdiscontinuedAoperationsAthatAareAreportedAseparatelyAbyAth
eAiAnvesteeAshouldAbeAshownAinAtheAsameAmannerAbyAtheAinvestor.ATheAmateriality
AofAthAeseAotherAinvesteeAincomeAelementsA(asAitAaffectsAtheAinvestor)AcontinuesAto

AbeAaAcriAterionAforAseparateAdisclosure.

InvesteeAlosses
LossesAreportedAbyAtheAinvesteeAcreateAcorrespondingAlossesAforAtheAinvestor.
AApermanentAdeclineAinAtheAfairAvalueAofAanAinvestee‘sAstockAshouldAbeArecognize
dAiAmmediatelyAbyAtheAinvestorAasAanAimpairmentAloss.
InvesteeAlossesAcanApossiblyAreduceAtheAcarryingAvalueAofAtheAinvestmentAaccoun
tAtAoAaAzeroAbalance.AAtAthatApoint,AtheAequityAmethodAceasesAtoAbeAapplicableAand
AtheAfAair-valueAmethodAisAsubsequentlyAused.

ReportingAtheAsaleAofAanAequityAinvestment
TheAinvestorAappliesAtheAequityAmethodAuntilAtheAdisposalAdateAtoAestablishAaAprop
erAbookAvalue.
FollowingAtheAsale,AtheAequityAmethodAcontinuesAtoAbeAappropriateAifAenoughAshare
sAareAstillAheldAtoAmaintainAtheAinvestor‘sAabilityAtoAsignificantlyAinfluenceAtheAinvest
ee.AIAfAthatAabilityAhasAbeenAlost,AtheAfair-valueAmethodAisAsubsequentlyAused.




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, SolutionAManualAForAAllAChapters


IV. ExcessAinvestmentAcostAoverAbookAvalueAacquired
TheApriceAanAinvestorApaysAforAequityAsecuritiesAoftenAdiffersAsignificantlyAfromAth
eAiAnvestee‘sAunderlyingAbookAvalueAprimarilyAbecauseAtheAhistoricalAcostAbasedA
accoAuntingAmodelAdoesAnotAkeepAtrackAofAchangesAinAaAfirm‘sAfairAvalue.
PaymentsAmadeAinAexcessAofAunderlyingAbookAvalueAcanAsometimesAbeAidentifiedAw
ithAspecificAinvesteeAaccountsAsuchAasAinventoryAorAequipment.
AnAextraAacquisitionApriceAcanAalsoAbeAassignedAtoAanticipatedAbenefitsAthatAareAexpectA
edAtoAbeAderivedAfromAtheAinvestment.AInAaccounting,AtheseAamountsAareApresumedAtoAr
eflectAanAintangibleAassetAreferredAtoAasAgoodwill.AGoodwillAisAcalculatedAasAanyAexcesAsA
paymentAthatAisAnotAattributableAtoAspecificAidentifiableAassetsAandAliabilitiesAofAtheAinvAes
tee.ABecauseAgoodwillAisAanAindefinite-livedAasset,AitAisAnotAamortized.

V.DeferralAofAintra-entityAgrossAprofitAinAinventory
TheAinvestor‘sAshareAofAintra-
entityAprofitsAinAendingAinventoryAareAnotArecognizedAuntilAtheAtransferredAgoodsAareAei
thAerAconsumedAorAuntilAtheyAareAresoldAtoAunrelatedAparties.
DownstreamAsalesAofAinventory
―Downstream‖ArefersAtoAtransfersAmadeAbyAtheAinvestorAtoAtheAinvestee.
Intra-
entityAgrossAprofitsAfromAsalesAareAinitiallyAdeferredAunderAtheAequityAmethodAan
dAtAhenArecognizedAasAincomeAatAtheAtimeAofAtheAinventory‘sAeventualAdisposal.
TheAamountAofAgrossAprofitAtoAbeAdeferredAisAtheAinvestor‘sAownershipApercentageA
multipliedAbyAtheAmarkupAonAtheAmerchandiseAremainingAatAtheAendAofAtheAyear.
UpstreamAsalesAofAinventory
―Upstream‖ArefersAtoAtransfersAmadeAbyAtheAinvesteeAtoAtheAinvestor.
UnderAtheAequityAmethod,AtheAdeferralAprocessAforAintra-
entityAgrossAprofitsAisAidenticalAforAupstreamAandAdownstreamAtransfers.ATheAproc
edAuresAareAseparatelyAidentifiedAinAChapterAOneAbecauseAtheAhandlingAdoesAvary
AwithAinAtheAconsolidationAprocess.




AnswersAtoADiscussionAQuestions
TheAtextbookAincludesAdiscussionAquestionsAtoAstimulateAstudentAthoughtAandAdiscussion.ATheseAqAue
stionsAareAalsoAdesignedAtoAallowAstudentsAtoAconsiderArelevantAissuesAthatAmightAotherwiseAbeAoAverl
ooked.ASomeAofAtheseAquestionsAmayAbeAaddressedAbyAtheAinstructorAinAclassAtoAmotivateAstudeAntAdi
scussion.AStudentsAshouldAbeAencouragedAtoAbeginAbyAdefiningAtheAissue(s)AinAeachAcase.ANext
authoritativeAaccountingAliteratureA(FASBAASC)AorAotherArelevantAliteratureAcanAbeAconsultedAasA
aApreliminaryAstepAinAarrivingAatAlogicalAactions.AFrequently,AtheAFASBAAccountingAStandardsACo
dificAationAwillAprovideAtheAnecessaryAsupport.

Unfortunately,AinAaccounting,AdefinitiveAresolutionsAtoAfinancialAreportingAquestionsAareAnotAalway
sAaAvailable.AStudentsAoftenAseemAtoAbelieveAthatAallAaccountingAissuesAhaveAbeenAresolvedAinAth
eApastAsoAthatAaccountingAeducationAisAonlyAaAmatterAofAlearningAtoAapplyAhistoricallyAprescribedAp
rocedureAs.AHowever,AinAactualApractice,AtheAonlyArealAanswerAisAoftenAtheAoneAthatAprovidesAtheAf
airestArepresAentationAofAtheAfirm‘sAtransactions.AIfAanAauthoritativeAsolutionAisAnotAavailable,Astude
ntsAshouldAbeAdAirectedAtoAlistAallAofAtheAissuesAinvolvedAandAtheAconsequencesAofApossibleAaltern
ativeAactions.ATheAvariousAfactorsApresentedAcanAbeAweighedAtoAproduceAaAviableAsolution.

TheAdiscussionAquestionsAareAdesignedAtoAhelpAstudentsAdevelopAresearchAandAcriticalAthinkingAs
killAsAinAaddressingAissuesAthatAgoAbeyondAtheApurelyAmechanicalAelementsAofAaccounting.



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