Solution Manual for Advanced Accounting 15th Edition By Joe Ben Hoyle, Thomas Schaefer And Timothy Doupnik

Solution Manual For All Chapters
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SOLUTION MANUAL FOR x@ x@




ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCH
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AEFER AND TIMOTHY DOUPNIK
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CHAPTER 1-19 x@




CHAPTER 1 TH x@ x@




E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
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Chapter Outline
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I. Four methods are principally used to account for an investment in equity securitie
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s along with a fair value option.
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A. Fair value method: applied by an investor when only a small percenta
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ge 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, invest
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ment is reported at cost. x@ x@ x@ x@




B. Cost Method: applied to investments without a readily determinable fair value.
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When the fair value of an investment in equity securities is not readily determi
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nable, and the investment provides neither significant influence nor control, the
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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 th
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e same issuer.
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The investor typically recognizes its share of investee dividends declared as div
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idend income. x@




C. Consolidation: when one firm controls another (e.g., when a parent has a m
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ajority interest in the voting stock of a subsidiary or control through variable
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interests, their financial statements are consolidated and reported for the co
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mbined entity. x@




D. Equity method: applied when the investor has the ability to exercise sig
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nificant influence over operating and financial policies of the investee.
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1. Ability to significantly influence investee is indicated by several factors incl
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uding representation on the board of directors, participation in policy-
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making, etc. x@




2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of t
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, 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
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new investment in equity shares including those where the equity method would ot
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herwise apply. However, the option, once taken, is irrevocable. The investor recog
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nizes both investee 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 equit
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y of the investee company.
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B. The investor accrues investee income when it is reported in the investee‘s fi
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nancial statements. x@




C. Dividends declared by the investee create a reduction in the carrying amount
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of the Investment account. This book assumes all investee dividends are decl
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ared and 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 influ
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ence 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 meth
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od (or 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 o
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f stock purchases, the investor applies the equity method prospectively. Th
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e total fair value at the date significant influence is attained is compared t
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o the investee‘s book value to determine future excess fair value amortizati
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ons.
B. Investee income from other than continuing operations
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1. The investor recognizes its share of investee reported other comprehe
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nsive income (OCI) through the investment account and the investor‘s
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own OCI.x@ x@


2. Income items such as discontinued operations that are reported separately
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by the investee should be shown in the same manner by the investor. Th
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e materiality of these other investee income elements (as it affects the inv
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estor) continues to be a criterion for separate disclosure.
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C. Investee losses x@


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 rec
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ognized immediately by the investor as an impairment loss.
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3. Investee losses can possibly reduce the carrying value of the investment a
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ccount to a zero balance. At that point, the equity method ceases to be ap
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plicable and the fair-value method is subsequently used.
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D. Reporting the sale of an equity investment
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1. The investor applies the equity method until the disposal date to establish a
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proper book value.
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2. Following the sale, the equity method continues to be appropriate if enough
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shares are still held to maintain the investor‘s ability to significantly influenc
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e the investee. If that ability has been lost, the fair-
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value method is subsequently used.
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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 fr
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om the investee‘s underlying book value primarily because the historical c
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ost based accounting model does not keep track of changes in a firm‘s f
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air value. x@


B. Payments made in excess of underlying book value can sometimes be identifi
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ed 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 ar
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e expected to be derived from the investment. In accounting, these amounts
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are presumed to reflect an intangible asset referred to as goodwill. Goodwill i
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s calculated as any excess payment that is not attributable to specific identifi
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able assets and liabilities of the investee. Because goodwill is an indefinite-
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lived asset, it is not amortized.
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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
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are either consumed or until they are resold to unrelated parties.
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B. Downstream sales of inventory x@ x@ x@


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


2. Intra-
entity gross profits from sales are initially deferred under the equity metho
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d and then recognized as income at the time of the inventory‘s eventual
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disposal. @


3. The amount of gross profit to be deferred is the investor‘s ownership per
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centage multiplied by the markup on the merchandise remaining at the e
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nd of the year. x@ x@ x@


C. Upstream sales of inventory x@ x@ x@


1. ―Upstream‖ refers to transfers made by the investee to the investor.
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2. Under the equity method, the deferral process for intra-
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entity gross profits is identical for upstream and downstream transfers. The
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procedures are separately identified in Chapter One because the handling
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does vary within the consolidation process.
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Answers to Discussion Questionsx@ x@ x@




The textbook includes discussion questions to stimulate student thought and discussion. T
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hese questions are also designed to allow students to consider relevant issues that might
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otherwise be overlooked. Some of these questions may be addressed by the instructor i
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n class to motivate student discussion. Students should be encouraged to begin by defini
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ng the issue(s) in each case. Next, authoritative accounting literature (FASB ASC) or oth
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er relevant literature can be consulted as a preliminary step in arriving at logical actions.
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@Frequently, the FASB Accounting Standards Codification will provide the necessary supp
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ort.

Unfortunately, in accounting, definitive resolutions to financial reporting questions are not a
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lways available. Students often seem to believe that all accounting issues have been res
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olved in the past so that accounting education is only a matter of learning to apply histo
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rically prescribed procedures. However, in actual practice, the only real answer is often t
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he one that provides the fairest representation of the firm‘s transactions. If an authoritativ
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e solution is not available, students should be directed to list all of the issues involved a
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nd the consequences of possible alternative actions. The various factors presented can b
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e weighed to produce a viable solution.
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