Solution Manual For All Chapters
w w w w
SOLUTION MANUAL FOR w w
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS
w w w w w w w w
SCHAEFER AND TIMOTHY DOUPNIK
w w w w
CHAPTER 1-19 w
CHAPTER 1 w
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
w w w w w w w
Chapter Outline w
I. Four methods are principally used to account for an investment in equity securities
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along with a fair value option.
w w w w w w
A. Fair value method: applied by an investor when only a small percentage
w w w w w w w w w w w
of a company‘s voting stock is held.
w w w w w w w
1. The investor recognizes income when the investee declares a dividend.
w w w w w w w w w
2. Portfolios are reported at fair value. If fair values are unavailable, investment
w w w w w w w w w w w
is reported at cost.
w w w w
B. Cost Method: applied to investments without a readily determinable fair value.
w w w w w w w w w w
When the fair value of an investment in equity securities is not readily
w w w w w w w w w w w w w
determinable, and the investment provides neither significant influence nor control,
w w w w w w w w w w
the investment may be measured at cost. The investment remains at cost unless
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1. A demonstrable impairment occurs for the investment, or
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2. An observable price change occurs for identical or similar investments of the
w w w w w w w w w w w
same issuer. w w
The investor typically recognizes its share of investee dividends declared as
w w w w w w w w w w
dividend income.
w w
C. Consolidation: when one firm controls another (e.g., when a parent has a w w w w w w w w w w w
majority interest in the voting stock of a subsidiary or control through variable
w w w w w w w w w w w w w
interests, their financial statements are consolidated and reported for the
w w w w w w w w w w
combined entity.
w w
D. Equity method: applied when the investor has the ability to exercise
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significant influence over operating and financial policies of the investee.
w w w w w w w w w w
1. Ability to significantly influence investee is indicated by several factors
w w w w w w w w w
including representation on the board of directors, participation in policy-
w w w w w w w w w w
making, etc. w
2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
w w w w w w w w w w w w w w
2-1
© wMcGraw wHill wLLC. wAll wrights wreserved. wNo wreproduction wor wdistribution wwithout wthe wprior wwritten wconsent wof wMcGraw
Hill LLC.
, outstanding voting stock of the investee is held by the investor.
w w w w w w w w w w
Current financial reporting standards allow firms to elect to use fair value for any new
w w w w w w w w w w w w w w
investment in equity shares including those where the equity method would otherwise
w w w w w w w w w w w w
apply. However, the option, once taken, is irrevocable. The investor recognizes both
w w w w w w w w w w w w
investee dividends and changes in fair value over time as income.
w w w w w w w w w w w
II. Accounting for an investment: the equity method
w w w w w w
A. The investor adjusts the investment account to reflect all changes in the equity of
w w w w w w w w w w w w w
the investee company.
w w w
B. The investor accrues investee income when it is reported in the investee‘s
w w w w w w w w w w w
financial statements.
w w
C. Dividends declared by the investee create a reduction in the carrying amount of
w w w w w w w w w w w w
the Investment account. This book assumes all investee dividends are declared
w w w w w w w w w w w
and paid in the same reporting period.
w w w w w w w
III. Special accounting procedures used in the application of the equity method
w w w w w w w w w w
A. Reporting a change to the equity method when the ability to significantly influence
w w w w w w w w w w w w
an investee is achieved through a series of acquisitions.
w w w w w w w w w
1. Initial purchase(s) will be accounted for by means of the fair value method (or
w w w w w w w w w w w w w
at cost) until the ability to significantly influence is attained.
w w w w w w w w w w
2. When the ability to exercise significant influence occurs following a series of
w w w w w w w w w w w
stock purchases, the investor applies the equity method prospectively. The
w w w w w w w w w w
total fair value at the date significant influence is attained is compared to the
w w w w w w w w w w w w w w
investee‘s book value to determine future excess fair value amortizations.
w w w w w w w w w w
B. Investee income from other than continuing operations
w w w w w w
1. The investor recognizes its share of investee reported other
w w w w w w w w
comprehensive income (OCI) through the investment account and the
w w w w w w w w w
investor‘s own OCI.
w w w
2. Income items such as discontinued operations that are reported separately by
w w w w w w w w w w
the investee should be shown in the same manner by the investor. The
w w w w w w w w w w w w w
materiality of these other investee income elements (as it affects the investor)
w w w w w w w w w w w w
continues to be a criterion for separate disclosure.
w w w w w w w w
C. Investee losses w
1. Losses reported by the investee create corresponding losses for the investor.
w w w w w w w w w w
2. A permanent decline in the fair value of an investee‘s stock should be
w w w w w w w w w w w w
recognized immediately by the investor as an impairment loss.
w w w w w w w w w
3. Investee losses can possibly reduce the carrying value of the investment
w w w w w w w w w w
account to a zero balance. At that point, the equity method ceases to be
w w w w w w w w w w w w w w
applicable and the fair-value method is subsequently used.
w w w w w w w w
D. Reporting the sale of an equity investment
w w w w w w
1. The investor applies the equity method until the disposal date to establish a
w w w w w w w w w w w w
proper book value.
w w w
2. Following the sale, the equity method continues to be appropriate if enough
w w w w w w w w w w w
shares are still held to maintain the investor‘s ability to significantly influence
w w w w w w w w w w w w
the investee. If that ability has been lost, the fair-value method is subsequently
w w w w w w w w w w w w w
used.
w
2-24
© wMcGraw wHill wLLC. wAll wrights wreserved. wNo wreproduction wor wdistribution wwithout wthe wprior wwritten wconsent wof wMcGraw
Hill LLC.
,Solution Manual For All Chapters
w w w w
IV. Excess investment cost over book value acquired
w w w w w w
A. The price an investor pays for equity securities often differs significantly from
w w w w w w w w w w w
the investee‘s underlying book value primarily because the historical cost
w w w w w w w w w w
based accounting model does not keep track of changes in a firm‘s fair
w w w w w w w w w w w w w
value. w
B. Payments made in excess of underlying book value can sometimes be identified
w w w w w w w w w w w
with specific investee accounts such as inventory or equipment.
w w w w w w w w w
C. An extra acquisition price can also be assigned to anticipated benefits that are
w w w w w w w w w w w w
expected to be derived from the investment. In accounting, these amounts are
w w w w w w w w w w w w
presumed to reflect an intangible asset referred to as goodwill. Goodwill is
w w w w w w w w w w w w
calculated as any excess payment that is not attributable to specific identifiable
w w w w w w w w w w w w
assets and liabilities of the investee. Because goodwill is an indefinite-lived asset,
w w w w w w w w w w w w
it is not amortized.
w w w w
V. Deferral of intra-entity gross profit in inventory
w w w w w w
A. The investor‘s share of intra-entity profits in ending inventory are not recognized
w w w w w w w w w w w
until the transferred goods are either consumed or until they are resold to unrelated
w w w w w w w w w w w w w w
parties. w
B. Downstream sales of inventory w w w
1. ―Downstream‖ refers to transfers made by the investor to the investee. w w w w w w w w w w
2. Intra-entity gross profits from sales are initially deferred under the equity w w w w w w w w w w
method and then recognized as income at the time of the inventory‘s
w w w w w w w w w w w w
eventual disposal. w w
3. The amount of gross profit to be deferred is the investor‘s ownership
w w w w w w w w w w w
percentage multiplied by the markup on the merchandise remaining at the
w w w w w w w w w w w
end of the year. w w w w
C. Upstream sales of inventory w w w
1. ―Upstream‖ refers to transfers made by the investee to the investor. w w w w w w w w w w
2. Under the equity method, the deferral process for intra-entity gross profits is
w w w w w w w w w w w
identical for upstream and downstream transfers. The procedures are
w w w w w w w w w
separately identified in Chapter One because the handling does vary within the
w w w w w w w w w w w w
consolidation process. w w
Answers to Discussion Questions
w w w
The textbook includes discussion questions to stimulate student thought and discussion. These
w w w w w w w w w w w
questions are also designed to allow students to consider relevant issues that might otherwise
w w w w w w w w w w w w w w
be overlooked. Some of these questions may be addressed by the instructor in class to
w w w w w w w w w w w w w w w
motivate student discussion. Students should be encouraged to begin by defining the issue(s)
w w w w w w w w w w w w w
in each case. Next, authoritative accounting literature (FASB ASC) or other relevant literature
w w w w w w w w w w w w w
can be consulted as a preliminary step in arriving at logical actions. Frequently, the FASB
w w w w w w w w w w w w w w w
Accounting Standards Codification will provide the necessary support.
w w w w w w w w
Unfortunately, in accounting, definitive resolutions to financial reporting questions are not
w w w w w w w w w w
always available. Students often seem to believe that all accounting issues have been
w w w w w w w w w w w w w
resolved in the past so that accounting education is only a matter of learning to apply
w w w w w w w w w w w w w w w w
historically prescribed procedures. However, in actual practice, the only real answer is often
w w w w w w w w w w w w w
the one that provides the fairest representation of the firm‘s transactions. If an authoritative
w w w w w w w w w w w w w w
solution is not available, students should be directed to list all of the issues involved and the
w w w w w w w w w w w w w w w w w
consequences of possible alternative actions. The various factors presented can be weighed
w w w w w w w w w w w w
to produce a viable solution.
w w w w w
The discussion questions are designed to help students develop research and critical thinking
w w w w w w w w w w w w
2-3
© wMcGraw wHill wLLC. wAll wrights wreserved. wNo wreproduction wor wdistribution wwithout wthe wprior wwritten wconsent wof wMcGraw
Hill LLC.
, w skills in addressing issues that go beyond the purely mechanical elements of accounting.
w w w w w w w w w w w w
2-3
© wMcGraw wHill wLLC. wAll wrights wreserved. wNo wreproduction wor wdistribution wwithout wthe wprior wwritten wconsent wof wMcGraw
Hill LLC.
w w w w
SOLUTION MANUAL FOR w w
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS
w w w w w w w w
SCHAEFER AND TIMOTHY DOUPNIK
w w w w
CHAPTER 1-19 w
CHAPTER 1 w
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
w w w w w w w
Chapter Outline w
I. Four methods are principally used to account for an investment in equity securities
w w w w w w w w w w w w
along with a fair value option.
w w w w w w
A. Fair value method: applied by an investor when only a small percentage
w w w w w w w w w w w
of a company‘s voting stock is held.
w w w w w w w
1. The investor recognizes income when the investee declares a dividend.
w w w w w w w w w
2. Portfolios are reported at fair value. If fair values are unavailable, investment
w w w w w w w w w w w
is reported at cost.
w w w w
B. Cost Method: applied to investments without a readily determinable fair value.
w w w w w w w w w w
When the fair value of an investment in equity securities is not readily
w w w w w w w w w w w w w
determinable, and the investment provides neither significant influence nor control,
w w w w w w w w w w
the investment may be measured at cost. The investment remains at cost unless
w w w w w w w w w w w w w
1. A demonstrable impairment occurs for the investment, or
w w w w w w w
2. An observable price change occurs for identical or similar investments of the
w w w w w w w w w w w
same issuer. w w
The investor typically recognizes its share of investee dividends declared as
w w w w w w w w w w
dividend income.
w w
C. Consolidation: when one firm controls another (e.g., when a parent has a w w w w w w w w w w w
majority interest in the voting stock of a subsidiary or control through variable
w w w w w w w w w w w w w
interests, their financial statements are consolidated and reported for the
w w w w w w w w w w
combined entity.
w w
D. Equity method: applied when the investor has the ability to exercise
w w w w w w w w w w
significant influence over operating and financial policies of the investee.
w w w w w w w w w w
1. Ability to significantly influence investee is indicated by several factors
w w w w w w w w w
including representation on the board of directors, participation in policy-
w w w w w w w w w w
making, etc. w
2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
w w w w w w w w w w w w w w
2-1
© wMcGraw wHill wLLC. wAll wrights wreserved. wNo wreproduction wor wdistribution wwithout wthe wprior wwritten wconsent wof wMcGraw
Hill LLC.
, outstanding voting stock of the investee is held by the investor.
w w w w w w w w w w
Current financial reporting standards allow firms to elect to use fair value for any new
w w w w w w w w w w w w w w
investment in equity shares including those where the equity method would otherwise
w w w w w w w w w w w w
apply. However, the option, once taken, is irrevocable. The investor recognizes both
w w w w w w w w w w w w
investee dividends and changes in fair value over time as income.
w w w w w w w w w w w
II. Accounting for an investment: the equity method
w w w w w w
A. The investor adjusts the investment account to reflect all changes in the equity of
w w w w w w w w w w w w w
the investee company.
w w w
B. The investor accrues investee income when it is reported in the investee‘s
w w w w w w w w w w w
financial statements.
w w
C. Dividends declared by the investee create a reduction in the carrying amount of
w w w w w w w w w w w w
the Investment account. This book assumes all investee dividends are declared
w w w w w w w w w w w
and paid in the same reporting period.
w w w w w w w
III. Special accounting procedures used in the application of the equity method
w w w w w w w w w w
A. Reporting a change to the equity method when the ability to significantly influence
w w w w w w w w w w w w
an investee is achieved through a series of acquisitions.
w w w w w w w w w
1. Initial purchase(s) will be accounted for by means of the fair value method (or
w w w w w w w w w w w w w
at cost) until the ability to significantly influence is attained.
w w w w w w w w w w
2. When the ability to exercise significant influence occurs following a series of
w w w w w w w w w w w
stock purchases, the investor applies the equity method prospectively. The
w w w w w w w w w w
total fair value at the date significant influence is attained is compared to the
w w w w w w w w w w w w w w
investee‘s book value to determine future excess fair value amortizations.
w w w w w w w w w w
B. Investee income from other than continuing operations
w w w w w w
1. The investor recognizes its share of investee reported other
w w w w w w w w
comprehensive income (OCI) through the investment account and the
w w w w w w w w w
investor‘s own OCI.
w w w
2. Income items such as discontinued operations that are reported separately by
w w w w w w w w w w
the investee should be shown in the same manner by the investor. The
w w w w w w w w w w w w w
materiality of these other investee income elements (as it affects the investor)
w w w w w w w w w w w w
continues to be a criterion for separate disclosure.
w w w w w w w w
C. Investee losses w
1. Losses reported by the investee create corresponding losses for the investor.
w w w w w w w w w w
2. A permanent decline in the fair value of an investee‘s stock should be
w w w w w w w w w w w w
recognized immediately by the investor as an impairment loss.
w w w w w w w w w
3. Investee losses can possibly reduce the carrying value of the investment
w w w w w w w w w w
account to a zero balance. At that point, the equity method ceases to be
w w w w w w w w w w w w w w
applicable and the fair-value method is subsequently used.
w w w w w w w w
D. Reporting the sale of an equity investment
w w w w w w
1. The investor applies the equity method until the disposal date to establish a
w w w w w w w w w w w w
proper book value.
w w w
2. Following the sale, the equity method continues to be appropriate if enough
w w w w w w w w w w w
shares are still held to maintain the investor‘s ability to significantly influence
w w w w w w w w w w w w
the investee. If that ability has been lost, the fair-value method is subsequently
w w w w w w w w w w w w w
used.
w
2-24
© wMcGraw wHill wLLC. wAll wrights wreserved. wNo wreproduction wor wdistribution wwithout wthe wprior wwritten wconsent wof wMcGraw
Hill LLC.
,Solution Manual For All Chapters
w w w w
IV. Excess investment cost over book value acquired
w w w w w w
A. The price an investor pays for equity securities often differs significantly from
w w w w w w w w w w w
the investee‘s underlying book value primarily because the historical cost
w w w w w w w w w w
based accounting model does not keep track of changes in a firm‘s fair
w w w w w w w w w w w w w
value. w
B. Payments made in excess of underlying book value can sometimes be identified
w w w w w w w w w w w
with specific investee accounts such as inventory or equipment.
w w w w w w w w w
C. An extra acquisition price can also be assigned to anticipated benefits that are
w w w w w w w w w w w w
expected to be derived from the investment. In accounting, these amounts are
w w w w w w w w w w w w
presumed to reflect an intangible asset referred to as goodwill. Goodwill is
w w w w w w w w w w w w
calculated as any excess payment that is not attributable to specific identifiable
w w w w w w w w w w w w
assets and liabilities of the investee. Because goodwill is an indefinite-lived asset,
w w w w w w w w w w w w
it is not amortized.
w w w w
V. Deferral of intra-entity gross profit in inventory
w w w w w w
A. The investor‘s share of intra-entity profits in ending inventory are not recognized
w w w w w w w w w w w
until the transferred goods are either consumed or until they are resold to unrelated
w w w w w w w w w w w w w w
parties. w
B. Downstream sales of inventory w w w
1. ―Downstream‖ refers to transfers made by the investor to the investee. w w w w w w w w w w
2. Intra-entity gross profits from sales are initially deferred under the equity w w w w w w w w w w
method and then recognized as income at the time of the inventory‘s
w w w w w w w w w w w w
eventual disposal. w w
3. The amount of gross profit to be deferred is the investor‘s ownership
w w w w w w w w w w w
percentage multiplied by the markup on the merchandise remaining at the
w w w w w w w w w w w
end of the year. w w w w
C. Upstream sales of inventory w w w
1. ―Upstream‖ refers to transfers made by the investee to the investor. w w w w w w w w w w
2. Under the equity method, the deferral process for intra-entity gross profits is
w w w w w w w w w w w
identical for upstream and downstream transfers. The procedures are
w w w w w w w w w
separately identified in Chapter One because the handling does vary within the
w w w w w w w w w w w w
consolidation process. w w
Answers to Discussion Questions
w w w
The textbook includes discussion questions to stimulate student thought and discussion. These
w w w w w w w w w w w
questions are also designed to allow students to consider relevant issues that might otherwise
w w w w w w w w w w w w w w
be overlooked. Some of these questions may be addressed by the instructor in class to
w w w w w w w w w w w w w w w
motivate student discussion. Students should be encouraged to begin by defining the issue(s)
w w w w w w w w w w w w w
in each case. Next, authoritative accounting literature (FASB ASC) or other relevant literature
w w w w w w w w w w w w w
can be consulted as a preliminary step in arriving at logical actions. Frequently, the FASB
w w w w w w w w w w w w w w w
Accounting Standards Codification will provide the necessary support.
w w w w w w w w
Unfortunately, in accounting, definitive resolutions to financial reporting questions are not
w w w w w w w w w w
always available. Students often seem to believe that all accounting issues have been
w w w w w w w w w w w w w
resolved in the past so that accounting education is only a matter of learning to apply
w w w w w w w w w w w w w w w w
historically prescribed procedures. However, in actual practice, the only real answer is often
w w w w w w w w w w w w w
the one that provides the fairest representation of the firm‘s transactions. If an authoritative
w w w w w w w w w w w w w w
solution is not available, students should be directed to list all of the issues involved and the
w w w w w w w w w w w w w w w w w
consequences of possible alternative actions. The various factors presented can be weighed
w w w w w w w w w w w w
to produce a viable solution.
w w w w w
The discussion questions are designed to help students develop research and critical thinking
w w w w w w w w w w w w
2-3
© wMcGraw wHill wLLC. wAll wrights wreserved. wNo wreproduction wor wdistribution wwithout wthe wprior wwritten wconsent wof wMcGraw
Hill LLC.
, w skills in addressing issues that go beyond the purely mechanical elements of accounting.
w w w w w w w w w w w w
2-3
© wMcGraw wHill wLLC. wAll wrights wreserved. wNo wreproduction wor wdistribution wwithout wthe wprior wwritten wconsent wof wMcGraw
Hill LLC.
