Advanced Accounting (Hoyle, Schaefer & Doupnik) — 15th Edition | Test Bank & Complete Solutions (2025 Verified)

Solution ManualFor All Chapters
ss ss ss ss




SOLUTION MANUAL FOR s s s s




ADVANCED ACCOUNTING 15TH EDITION BYJOEBEN HOYLE, THOMAS SCHAEFER ss ss ss ss ss ss ss ss ss




AND TIMOTHY DOUPNIK
ss ss ss




CHAPTER1-19 s




CHAPTER1 s




THEEQUITYMETHODOFACCOUNTINGFORINVESTMENTS
ss s s s s s s




Chapter Outline ss




I. Four methods are principally used to account for an investment in equity securities along with
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




a fair value option.
ss ss ss ss




A. Fair value method: applied by an investor when only a small percentage of a
ss ss ss ss ss ss ss ss ss ss ss ss ss




company‘s voting stock is held.
ss ss ss ss ss




1. Theinvestor recognizes income when the investee declares a dividend.ss ss ss ss ss ss ss ss ss




2. Portfolios are reported at fair value. If fair values are unavailable, investment is ss ss ss ss ss ss ss ss ss ss ss ss




reported at cost. ss ss ss




B. Cost Method: applied to investments without a readily determinable fair value. When the
ss ss ss ss ss ss ss ss ss ss ss ss




fair value of an investment in equity securities is not readily determinable, and the
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




investment provides neither significant influence nor control, the investment may be
ss ss ss ss ss ss ss ss ss ss ss




measured at cost. The investment remains at cost unless
ss ss ss ss ss ss ss ss ss




1. A demonstrable impairment occurs for the investment, or
ss ss ss ss ss ss ss




2. An observable price change occurs for identical or similar investments of the same
ss ss ss ss ss ss ss ss ss ss ss ss




issuer. ss




The investor typically recognizes its share of investee dividends declared as dividend
ss ss ss ss ss ss ss ss ss ss ss




income.
ss




C. Consolidation: when one firm controls another (e.g., when a parent has a majority ss ss ss ss ss ss ss ss ss ss ss ss




interest in the voting stock of a subsidiary or control through variable interests, their
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




financial statements are consolidated and reported for the combined entity.
ss ss ss ss ss ss ss ss ss ss




D. Equity method: applied when the investor has the ability to exercise significant
ss ss ss ss ss ss ss ss ss ss ss




influence over operating and financial policies of the investee.
ss ss ss ss ss ss ss ss ss




1. Ability to significantly influence investee is indicated byseveralfactors including ss ss ss ss ss ss ss ss ss ss




representation on the board of directors, participation in policy-making, etc.
ss ss ss ss ss ss ss ss ss ss




2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the ss ss ss ss ss ss ss ss ss ss ss ss ss ss




2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss

, outstanding voting stock of the investee is held by the investor. ss ss ss ss ss ss ss ss ss ss




Current financial reporting standards allow firms to elect to use fair value for any new
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




investment in equity shares including those where the equity method would otherwise apply.
ss ss ss ss ss ss ss ss ss ss ss ss ss




However, the option, once taken, is irrevocable. The investor recognizes both investee
ss ss ss ss ss ss ss ss ss ss ss ss




dividends and changes in fair value over time as income.
ss ss ss ss ss ss ss ss ss ss




II. Accounting for an investment: the equity method ss ss ss ss ss ss




A. The investor adjusts the investment account to reflect all changes in the equity of the
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




investee company.
ss ss




B. The investor accrues investee income when it is reported in the investee‘s financial
ss ss ss ss ss ss ss ss ss ss ss ss




statements.
ss




C. Dividends declared by the investee create a reduction in the carrying amount of the
ss ss ss ss ss ss ss ss ss ss ss ss ss




Investment account. This book assumes all investee dividends are declared and paid in
ss ss ss ss ss ss ss ss ss ss ss ss ss




the same reporting period.
ss ss ss ss




III. Special accounting procedures usedinthe application of theequity method
ss ss ss ss ss ss ss ss ss ss




A. Reporting a change to the equity method when the ability to significantly influence an
ss ss ss ss ss ss ss ss ss ss ss ss ss




investee is achieved through a series of acquisitions.
ss ss ss ss ss ss ss ss




1. Initial purchase(s) will be accounted for by means of the fair value method (or at cost)
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




until the ability to significantly influence is attained.
ss ss ss ss ss ss ss ss




2. When the ability to exercise significant influence occurs following a series of stock
ss ss ss ss ss ss ss ss ss ss ss ss




purchases, the investor applies the equity method prospectively. The total fair value
ss ss ss ss ss ss ss ss ss ss ss ss




at the date significant influence is attained is compared to the investee‘s book value to
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




determine future excess fair value amortizations.
ss ss ss ss ss ss




B. Investee incomefrom other than continuing operations ss s ss ss ss ss




1. The investor recognizes its share of investee reported other comprehensive
ss ss ss ss ss ss ss ss ss




income (OCI) through the investment account and the investor‘s own OCI.
ss ss ss ss ss ss ss ss ss ss ss




2. Income items such as discontinued operations that are reported separately by the ss ss ss ss ss ss ss ss ss ss ss




investee should be shown in the same manner by the investor. The materiality of
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




these other investee income elements (as it affects the investor) continues to be a
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




criterion for separate disclosure.
ss ss ss ss




C. Investee losses ss




1. Losses reported by the investee create corresponding losses for the investor. ss ss ss ss ss ss ss ss ss ss




2. A permanent decline in the fair value of an investee‘s stock should be recognized
ss ss ss ss ss ss ss ss ss ss ss ss ss




immediately by the investor as an impairment loss.
ss ss ss ss ss ss ss ss




3. Investee losses can possibly reduce the carrying value of the investment account to a ss ss ss ss ss ss ss ss ss ss ss ss ss




zero balance. At that point, the equity method ceases to be applicable and the fair-
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




value method is subsequently used. ss ss ss ss




D. Reporting the sale of an equity investment ss ss ss ss ss ss




1. The investor applies the equity method until the disposal date to establish a proper book
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




value. ss




2. Following the sale, the equity method continues to be appropriate if enough shares are ss ss ss ss ss ss ss ss ss ss ss ss ss




still held to maintain the investor‘s ability to significantly influence the investee. If that
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




ability has been lost, the fair-value method is subsequently used.
ss ss ss ss ss ss ss ss ss ss




2-24
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss

,Solution ManualFor All Chapters
ss ss ss ss




IV. Excess investment cost over book value acquired ss ss ss ss ss ss




A. The price an investor pays for equity securities often differs significantly from the
ss ss ss ss ss ss ss ss ss ss ss ss




investee‘s underlying book value primarily because the historical cost based
ss ss ss ss ss ss ss ss ss ss




accounting model does not keep track of changes in a firm‘s fair value.
ss ss ss ss ss ss ss ss ss ss ss ss ss




B. Payments made in excess of underlying book value can sometimes be identified with ss ss ss ss ss ss ss ss ss ss ss ss




specific investee accounts such as inventory or equipment.
ss ss ss ss ss ss ss ss




C. An extra acquisition price can also be assigned to anticipated benefits that are expected
ss ss ss ss ss ss ss ss ss ss ss ss ss




to be derived from the investment. In accounting, these amounts are presumed to reflect
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




an intangible asset referred to as goodwill. Goodwill is calculated as any excess payment
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




that is not attributable to specific identifiable assets and liabilities of the investee.
ss ss ss ss ss ss ss ss ss ss ss ss ss




Because goodwill is an indefinite-lived asset, it is not amortized.
ss ss ss ss ss ss ss ss ss ss




V. Deferral of intra-entity gross profit in inventory ss ss ss ss ss ss




A. The investor‘s share of intra-entity profits in ending inventory are not recognized until the
ss ss ss ss ss ss ss ss ss ss ss ss ss




transferred goods are either consumed or until they are resold to unrelated parties.
ss ss ss ss ss ss ss ss ss ss ss ss ss




B. Downstream sales of inventory ss ss ss




1. ―Downstream‖ refers to transfers made by the investor totheinvestee. ss ss ss ss ss ss ss ss ss ss




2. Intra-entity gross profits from sales are initially deferred under the equity method and ss ss ss ss ss ss ss ss ss ss ss ss




then recognized as income at the time of the inventory‘s eventual disposal.
ss ss ss ss ss ss ss ss ss ss ss ss




3. The amount of gross profit to be deferred is the investor‘s ownership percentage ss ss ss ss ss ss ss ss ss ss ss ss




multiplied by the markup on the merchandise remaining at the end of the year.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




C. Upstream sales of inventory ss ss ss




1. ―Upstream‖ refers totransfers made by theinvestee totheinvestor. ss ss ss ss ss ss ss ss ss ss




2. Under the equity method, the deferral process for intra-entity gross profits is identical ss ss ss ss ss ss ss ss ss ss ss ss




for upstream and downstream transfers. The procedures are separately identified in
ss ss ss ss ss ss ss ss ss ss ss




Chapter One because the handling does vary within the consolidation process.
ss ss ss ss ss ss ss ss ss ss ss




Answers to Discussion Questions
ss ss ss




The textbook includes discussion questions to stimulate student thought and discussion. These
ss ss ss ss ss ss ss ss ss ss ss




questions are also designed to allow students to consider relevant issues that might otherwise be
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




overlooked. Some of these questions may be addressed by the instructor in class to motivate student
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




discussion. Students should be encouraged to begin by defining the issue(s) in each case. Next,
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




authoritative accounting literature (FASB ASC) or other relevant literature can be consulted as a
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




preliminary step in arriving at logical actions. Frequently, the FASB Accounting Standards
ss ss ss ss ss ss ss ss ss ss ss ss




Codification will provide the necessary support.
ss ss ss ss ss ss




Unfortunately, in accounting, definitive resolutions tofinancial reporting questions are not always
ss ss ss ss ss ss ss ss ss ss ss




available. Students often seem to believe that all accounting issues have been resolved in the past so
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




that accounting education is only a matter of learning to apply historically prescribed procedures.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




However, in actual practice, the only real answer is often the one that provides the fairest
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




representation of the firm‘s transactions. If an authoritative solution is not available, students should
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




be directed to list all of the issues involved and the consequences of possible alternative actions. The
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




various factors presented can be weighed to produce a viable solution.
ss ss ss ss ss ss ss ss ss ss ss




The discussion questions are designed to help students develop research and critical thinking skills in
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




addressing issues that go beyond the purely mechanical elements of accounting.
ss ss ss ss ss ss ss ss ss ss ss




2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss

, Did the Cost Method Invite Manipulation?
ss ss ss ss ss




The cost method of accounting for investments often caused a lack of objectivity in reported income
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




figures. With a large block of the investee‘s voting shares, an investor could influence the amount and
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




timing of the investee‘s dividend declarations. Thus, when enjoying a good earnings year, an investor
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




might influence the investee to withhold declaring a dividend until needed in a subsequent year.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




Alternatively, if the investor judged that its current year earnings ―needed a boost,‖ it might influence
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




the investee to declare a current year dividend. The equity method effectively removes managers‘
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




ability to increase current income (or defer income to future periods) through their influence over the
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




timing and amounts of investee dividend declarations.
ss ss ss ss ss ss ss




At first glance it may seem that the fair value method allows managers to manipulate income because
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




investee dividends are recorded as income by the investor. However, dividends paid typically are
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




accompanied by a decrease in fair value (also recognized in income), thus leaving reported net income
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




unaffected.
ss




Does the Equity Method Really Apply Here?
ss ss ss ss ss ss




The discussion in the case between the two accountants is limited to the reason for the investment
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




acquisition and the current percentage of ownership. Instead, they should be examining the actual
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




interaction that currently exists between the two companies. Although the ability to exercise significant
ss ss ss ss ss ss ss ss ss ss ss ss ss ss




influence over operating and financial policies appears to be a rather vague criterion, ASC 323
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




"Investments—Equity Method and Joint Ventures," clearly specifies actual events that indicate this
ss ss ss ss ss ss ss ss ss ss ss ss




level of authority (paragraph 323-10-15-6):
ss ss ss ss ss




Ability to exercise that influence may be indicated in several ways, such as representation on the board
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




of directors, participation in policy-making processes, material intra-entity transactions, interchange
ss ss ss ss ss ss ss ss ss ss




of managerial personnel, or technological dependency. Another important consideration is the extent
ss ss ss ss ss ss ss ss ss ss ss ss




of ownership by an investor in relation to the concentration of other shareholdings, but substantial or
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




majority ownership of the voting stock of an investee company by another investor does not
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




necessarily preclude the ability to exercise significant influence by the investor.
ss ss ss ss ss ss ss ss ss ss ss




In this case, the accountants would be wise to determine whether Dennis Bostitch or any other
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




member of the Highland Laboratories administration is participating in the management of Abraham,
ss ss ss ss ss ss ss ss ss ss ss ss ss




Inc. If any individual from Highland's organization is on Abraham‘s board of directors or is participating
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




in management decisions, the equity method would seem to be appropriate.
ss ss ss ss ss ss ss ss ss ss ss




Likewise, if significant transactions have occurred between the companies (such as loans by Highland
ss ss ss ss ss ss ss ss ss ss ss ss ss




toAbraham), the ability to apply significant influence becomes much more evident.
ss ss ss ss ss ss ss ss ss ss ss ss




However, if James Abraham continues to operate Abraham, Inc., with little or no regard for Highland,
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




the equity method should not be applied. This possibility seems especially likely in this case since one
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




stockholder, James Abraham, continues to hold a majority (2/3) of the voting stock. Thus, evidence of
ss ss ss ss ss ss ss ss ss ss ss ss s s ss ss ss




the ability to apply significant influence must be present before the equity method is viewed as
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss




applicable. The mere holding of 1/3 of the stock is not conclusive.
ss ss ss ss ss ss ss ss ss ss ss ss




2-44
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss ss