SOLUTIONS MANUAL for Advanced Accounting, 15th Edition by Joe Ben Hoyle, Schaefer and Doupnik | Complete 19 Chapters

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Hill LLC.

,SOLUTION MANUAL FOR pc pc




ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHA
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EFER AND TIMOTHY DOUPNIK
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CHAPTER 1-19 pc




CHAPTER 1 TH pc pc




E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
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Chapter Outline pc




I. Four methods are principally used to account for an investment in equity securities al
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ong with a fair value option.
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A. Fair value method: applied by an investor when only a small percentage
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of a company‘s voting stock is held.
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1. The investor recognizes income when the investee declares a dividend.
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2. Portfolios are reported at fair value. If fair values are unavailable, investmen
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t is reported at cost.
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B. Cost Method: applied to investments without a readily determinable fair value. Wh
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en the fair value of an investment in equity securities is not readily determinable, a
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nd the investment provides neither significant influence nor control, the investment
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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 sa
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me issuer. pc




The investor typically recognizes its share of investee dividends declared as dividen
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d income.
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C. Consolidation: when one firm controls another (e.g., when a parent has a majori
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ty interest in the voting stock of a subsidiary or control through variable interests
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, their financial statements are consolidated and reported for the combined entit
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y.

D. Equity method: applied when the investor has the ability to exercise signific
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ant influence over operating and financial policies of the investee.
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1. Ability to significantly influence investee is indicated by several factors includi
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ng representation on the board of directors, participation in policy-
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making, etc. pc




2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
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©pcMcGrawpcHillpcLLC.pcAllpcrightspcreserved.pcNopcreproductionpcorpcdistributionpcwithoutpcthepcpriorpcwrittenpcconsentpcofpcMcGrawpc
Hill LLC.

, outstanding voting stock of the investee is held by the investor.
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Current financial reporting standards allow firms to elect to use fair value for any new i
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nvestment in equity shares including those where the equity method would otherwise a
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pply. However, the option, once taken, is irrevocable. The investor recognizes both inv
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estee dividends and changes in fair value over time as income.
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II. Accounting for an investment: the equity method
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A. The investor adjusts the investment account to reflect all changes in the equity of
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the investee company.
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B. The investor accrues investee income when it is reported in the investee‘s finan
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cial statements.
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C. Dividends declared by the investee create a reduction in the carrying amount of th
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e Investment account. This book assumes all investee dividends are declared and
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paid in the same reporting period.
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III. Special accounting procedures used in the application of the equity method
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A. Reporting a change to the equity method when the ability to significantly influence
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an investee is achieved through a series of acquisitions.
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1. Initial purchase(s) will be accounted for by means of the fair value method (o
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r at cost) until the ability to significantly influence is attained.
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2. When the ability to exercise significant influence occurs following a series of st
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ock purchases, the investor applies the equity method prospectively. The total
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fair value at the date significant influence is attained is compared to the invest
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ee‘s book value to determine future excess fair value amortizations.
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B. Investee income from other than continuing operations
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1. The investor recognizes its share of investee reported other comprehensi
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ve income (OCI) through the investment account and the investor‘s own
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OCI.
2. Income items such as discontinued operations that are reported separately by t
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he investee should be shown in the same manner by the investor. The materia
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lity of these other investee income elements (as it affects the investor) continue
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s to be a criterion for separate disclosure.
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C. Investee losses pc


1. Losses reported by the investee create corresponding losses for the investor.
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2. A permanent decline in the fair value of an investee‘s stock should be recogni
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zed immediately by the investor as an impairment loss.
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3. Investee losses can possibly reduce the carrying value of the investment accou
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nt to a zero balance. At that point, the equity method ceases to be applicable a
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nd the fair-value method is subsequently used.
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D. Reporting the sale of an equity investment pc pc pc pc pc pc


1. The investor applies the equity method until the disposal date to establish a pro
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per book value. pc pc


2. Following the sale, the equity method continues to be appropriate if enough sha
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res are still held to maintain the investor‘s ability to significantly influence the in
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vestee. If that ability has been lost, the fair-value method is subsequently used.
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2-24
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Hill LLC.

, Solution Manual For All Chapters
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IV. Excess investment cost over book value acquired
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A. The price an investor pays for equity securities often differs significantly from t
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he investee‘s underlying book value primarily because the historical cost bas
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ed accounting model does not keep track of changes in a firm‘s fair value.
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B. Payments made in excess of underlying book value can sometimes be identified
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with specific investee accounts such as inventory or equipment.
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C. An extra acquisition price can also be assigned to anticipated benefits that are ex
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pected to be derived from the investment. In accounting, these amounts are pres
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umed to reflect an intangible asset referred to as goodwill. Goodwill is calculated
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as any excess payment that is not attributable to specific identifiable assets and li
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abilities of the investee. Because goodwill is an indefinite-
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lived asset, it is not amortized. pc pc pc pc pc




V. Deferral of intra-entity gross profit in inventory
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A. The investor‘s share of intra-
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entity profits in ending inventory are not recognized until the transferred goods are
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either consumed or until they are resold to unrelated parties.
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B. Downstream sales of inventory pc pc pc


1. ―Downstream‖ refers to transfers made by the investor to the investee. pc pc pc pc pc pc pc pc pc pc


2. Intra-
entity gross profits from sales are initially deferred under the equity method a
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nd then recognized as income at the time of the inventory‘s eventual disposa
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3. The amount of gross profit to be deferred is the investor‘s ownership percent
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age multiplied by the markup on the merchandise remaining at the end of the
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year. pc


C. Upstream sales of inventory pc pc pc


1. ―Upstream‖ refers to transfers made by the investee to the investor. pc pc pc pc pc pc pc pc pc pc


2. Under the equity method, the deferral process for intra-pc pc pc pc pc pc pc pc


entity gross profits is identical for upstream and downstream transfers. The pro
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cedures are separately identified in Chapter One because the handling does v
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ary within the consolidation process. pc pc pc pc




Answers to Discussion Questions pc pc pc




The textbook includes discussion questions to stimulate student thought and discussion. Thes
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e questions are also designed to allow students to consider relevant issues that might otherwi
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se be overlooked. Some of these questions may be addressed by the instructor in class to m
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otivate student discussion. Students should be encouraged to begin by defining the issue(s) i
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n each case. Next, authoritative accounting literature (FASB ASC) or other relevant literature
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can be consulted as a preliminary step in arriving at logical actions. Frequently, the FASB Ac
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counting Standards Codification will provide the necessary support.
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Unfortunately, in accounting, definitive resolutions to financial reporting questions are not alwa
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ys available. Students often seem to believe that all accounting issues have been resolved in
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the past so that accounting education is only a matter of learning to apply historically prescrib
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ed procedures. However, in actual practice, the only real answer is often the one that provide
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s the fairest representation of the firm‘s transactions. If an authoritative solution is not availabl
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e, students should be directed to list all of the issues involved and the consequences of possi
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ble alternative actions. The various factors presented can be weighed to produce a viable sol
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ution.

The discussion questions are designed to help students develop research and critical thinking
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©pcMcGrawpcHillpcLLC.pcAllpcrightspcreserved.pcNopcreproductionpcorpcdistributionpcwithoutpcthepcpriorpcwrittenpcconsentpcofpcMcGrawpc
Hill LLC.