Advanced Accounting,
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5th Edition
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by Patrick Hopkins and Halsey
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, Advanced Accounting Fift yu yu
h Edition yu
By Patrick E. Hopkins and Robert F. Halsey
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Solution Manual yu
Chapter 1— Accounting for Intercorporate Investments
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1. a. If the investor acquired 100% of the investee at book value, the Equity Investmen
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t account is equal to the Stockholders’ Equity of the investee company. It, therefo
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re, includes the assets and liabilities of the investee company in one account. The
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investor’s balance sheet, therefore, includes the Stockholders’ Equity of the invest
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ee company, and, implicitly, its assets and liabilities. In the consolidation process,
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the balance sheets of the investor and investee company are brought together. C
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onsolidated Stockholders’ Equity will be the same as that which the investor curre
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ntly reports; only total assets and total liabilities will change.
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b. If the investor owns 100% of the investee, the equity income that the investor repor
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ts is equal to the net income of the investee, thus implicitly including its revenues
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and expenses. Replacing the equity income with the revenues and expenses of th
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e investee company in the consolidation process will yield the same net income.
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2. FASB ASC 323- yu y u
10 provides the following guidance with respect to the accounting for receipt
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of dividends using the equity method:
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The equity method tends to be most appropriate if an investment enables the
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investor to influence the operating or financial decisions of the investee. The i
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nvestor then has a degree of responsibility for the return on its investment, a
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nd it is appropriate to include in the results of operations of the investor its s
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hare of the earnings or losses of the investee. (¶323-10-05-5)
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The equity method is an appropriate means of recognizing increases or decreases me
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asured by generally accepted accounting principles (GAAP) in the economic resources
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underlying the investments. Furthermore, the equity method of accounting more close
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ly meets the objectives of accrual accounting than does the cost method because the
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investor recognizes its share of the earnings and losses of the investee in the period
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s in which they are reflected in the accounts of the investee. (¶323-10-05-4)
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Under the equity method, an investor shall recognize its share of the earnings or loss
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es of an investee in the periods for which they are reported by the investee in its fin
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ancial statements rather than in the period in which an investee declares a dividend (
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¶323-10- 35-4). yu
2023
Solutionsy uManual,yuChaptery 1-1
u1
,3. The recognition of equity income does not mean that cash has been received. In fact,
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dividends paid by the investee to the investor are typically a small percentage of its
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reported net income. The projection of future net income that includes equity income
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as a significant component might not, therefore, imply significant generation of cash.
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4. The accounting for Altria’s investment in ABI depends on the degree of influence or c
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ontrol it can exert over that company. A classification of “no influence” does not appe
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ar appropriate since Altria owns 10.1% of the outstanding common stock and also “a
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ctive representation on ABI’s Board of Directors (“ABI Board”) and certain ABI Board
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committees. Through this representation, Altria participates in ABI policy making proc
yu yu yu yu yu yu yu yu yu yu
esses.” A classification of “significant influence” seems most appropriate given the fac
yu yu yu yu yu yu yu yu yu yu yu
ts, and this classification warrants accounting for the investment using the equity met
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hod of accounting.
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5. a. An investor may write down the carrying amount of its Equity Investment if the f
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air value of that investment has declined below its carrying value and that decline
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is deemed to be other than temporary.
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b. There is considerable judgment in determining whether a decline in fair value is oth
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er than temporary. The write-
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down amounts to a prediction that the future fair value of the investment will not
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rise above the current carrying amount. If a company deems the decline to be te
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mporary, it does not write down the investment, and a loss is not recognized in it
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
s income statement. If the decline is deemed to be other than temporary, the inv
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estment is written down and a loss is reported. Companies can use this flexibility to
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decide whether to recognize a loss in the current year or to postpone it to a future
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year. yu
6. Under the equity method, an investor recognizes its share of the earnings or losses of
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an investee in the periods for which they are reported by the investee in its financial
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statements. FASB ASC 323-10-35-7 states that “Intra-
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entity profits and losses shall be eliminated until realized by the investor or investee as
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if the investee were consolidated.” These intercompany items are eliminated to avoid
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double counting and prematurely recognizing income.
u yu yu yu yu yu
2023
1-2 Advancedy u Accounting,y u5thyuEditio
n
, 7. FASB ASC 323-10- yu yu
15 requires the use of the equity method of accounting for an investor whose invest
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ment in voting stock gives it the ability to exercise significant influence over operating
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and financial policies of an investee. Section 15-
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6 states that “Ability to exercise significant influence over operating and financial polici
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es of an investee may be indicated in several ways, including the following: Represent
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ation on the board of directors, Participation in policy-
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making processes, Material intra- yu yu yu
entity transactions, change of managerial personnel, Technological dependency, and Ex
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tent of ownership by an investor in relation to the concentration of other shareholdin
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gs (but substantial or majority ownership of the voting stock of an investee by anoth
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er investor does not necessarily preclude the ability to exercise significant influence b
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y the investor)” (emphasis added). It is clear, in this case, that the investee is criticall
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y dependent upon the technology licensed to it by the investor. The investor should,
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therefore, account for its investment using the equity method.
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8. Even though the investor owns 30% of the investee, it should not use the equity met
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hod as it cannot exert significant influence over the investee. Further, since the investe
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e is not a public company (all of the remaining stock is privately held), the investor sho
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
uld use the cost method to account for this investment as the fair value method pres
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umes a publicly traded stock with sufficient liquidity to reasonably determine a fair v
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alue.
9. a. The losses did not affect Enron’s income statement. Since the investees were insol
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vent, Enron’s Equity Investment was reduced to zero (it had not made any loans o
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r other advances to the investee companies). As a result, Enron discontinued repo
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rting for these Equity Investments using the equity method and, therefore, did no
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t recognize its proportionate share of investee losses.
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b. “… only after its share of that net income equals the share of net losses not recogniz
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ed during the period the equity method was suspended” means that the investee
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has recouped all of the losses that have been reported. Since the investor ceases
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to account for its Equity Investment using the equity method once the balance re
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aches zero (assuming that it has not guaranteed the debts of the investee compa
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ny), this generally implies that the investee’s Stockholders’ Equity is below zero (i.e.
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, a deficit). The investor resumes its accounting for the Equity investment using th
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e equity method once the investee’s Stockholders’ Equity is positive. It is at that
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point when the investee company has recouped all of its prior losses (assuming th
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at the investee company has not raised additional equity capital).
yu yu yu yu yu yu yu yu yu
2023
Solutionsy uManual,yuChaptery 1-3
u1
yu
5th Edition
yu
by Patrick Hopkins and Halsey
yu yu yu yu
, Advanced Accounting Fift yu yu
h Edition yu
By Patrick E. Hopkins and Robert F. Halsey
yu yu yu yu yu yu yu
Solution Manual yu
Chapter 1— Accounting for Intercorporate Investments
yu yu yu yu yu
1. a. If the investor acquired 100% of the investee at book value, the Equity Investmen
y u yu yu yu yu yu yu yu yu yu yu yu yu yu
t account is equal to the Stockholders’ Equity of the investee company. It, therefo
yu yu yu yu yu yu yu yu yu yu yu yu yu
re, includes the assets and liabilities of the investee company in one account. The
yu yu yu yu yu yu yu yu yu yu yu yu yu y
investor’s balance sheet, therefore, includes the Stockholders’ Equity of the invest
u yu yu yu yu yu yu yu yu yu yu
ee company, and, implicitly, its assets and liabilities. In the consolidation process,
yu yu yu yu yu yu yu yu yu yu yu yu
the balance sheets of the investor and investee company are brought together. C
yu yu yu yu yu yu yu yu yu yu yu yu
onsolidated Stockholders’ Equity will be the same as that which the investor curre
yu yu yu yu yu yu yu yu yu yu yu yu
ntly reports; only total assets and total liabilities will change.
yu yu yu yu yu yu yu yu yu
b. If the investor owns 100% of the investee, the equity income that the investor repor
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
ts is equal to the net income of the investee, thus implicitly including its revenues
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and expenses. Replacing the equity income with the revenues and expenses of th
yu yu yu yu yu yu yu yu yu yu yu yu yu
e investee company in the consolidation process will yield the same net income.
yu yu yu yu yu yu yu yu yu yu yu yu
2. FASB ASC 323- yu y u
10 provides the following guidance with respect to the accounting for receipt
yu y u y u y u y u yu y u yu y u y u yu yu
of dividends using the equity method:
yu yu yu yu yu
The equity method tends to be most appropriate if an investment enables the
yu yu yu yu yu yu yu yu yu yu yu yu y
investor to influence the operating or financial decisions of the investee. The i
u yu yu yu yu yu yu yu yu yu yu yu yu
nvestor then has a degree of responsibility for the return on its investment, a
yu yu yu yu yu yu yu yu yu yu yu yu yu
nd it is appropriate to include in the results of operations of the investor its s
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
hare of the earnings or losses of the investee. (¶323-10-05-5)
yu yu yu yu yu yu yu yu yu
The equity method is an appropriate means of recognizing increases or decreases me
yu yu yu yu yu yu yu yu yu yu yu yu
asured by generally accepted accounting principles (GAAP) in the economic resources
yu yu yu yu yu yu yu yu yu yu yu
underlying the investments. Furthermore, the equity method of accounting more close
yu yu yu yu yu yu yu yu yu yu
ly meets the objectives of accrual accounting than does the cost method because the
yu yu yu yu yu yu yu yu yu yu yu yu yu
investor recognizes its share of the earnings and losses of the investee in the period
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
s in which they are reflected in the accounts of the investee. (¶323-10-05-4)
yu yu yu yu yu yu yu yu yu yu yu yu
Under the equity method, an investor shall recognize its share of the earnings or loss
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
es of an investee in the periods for which they are reported by the investee in its fin
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
ancial statements rather than in the period in which an investee declares a dividend (
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¶323-10- 35-4). yu
2023
Solutionsy uManual,yuChaptery 1-1
u1
,3. The recognition of equity income does not mean that cash has been received. In fact,
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
dividends paid by the investee to the investor are typically a small percentage of its
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
reported net income. The projection of future net income that includes equity income
yu yu yu yu yu yu yu yu yu yu yu yu y
as a significant component might not, therefore, imply significant generation of cash.
u yu yu yu yu yu yu yu yu yu yu yu
4. The accounting for Altria’s investment in ABI depends on the degree of influence or c
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
ontrol it can exert over that company. A classification of “no influence” does not appe
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
ar appropriate since Altria owns 10.1% of the outstanding common stock and also “a
yu yu yu yu yu yu yu yu yu yu yu yu yu
ctive representation on ABI’s Board of Directors (“ABI Board”) and certain ABI Board
yu yu yu yu yu yu yu yu yu yu yu yu yu
committees. Through this representation, Altria participates in ABI policy making proc
yu yu yu yu yu yu yu yu yu yu
esses.” A classification of “significant influence” seems most appropriate given the fac
yu yu yu yu yu yu yu yu yu yu yu
ts, and this classification warrants accounting for the investment using the equity met
yu yu yu yu yu yu yu yu yu yu yu yu
hod of accounting.
yu yu
5. a. An investor may write down the carrying amount of its Equity Investment if the f
y u yu yu yu yu yu yu yu yu yu yu yu yu yu yu
air value of that investment has declined below its carrying value and that decline
yu yu yu yu yu yu yu yu yu yu yu yu yu
is deemed to be other than temporary.
yu yu yu yu yu yu yu
b. There is considerable judgment in determining whether a decline in fair value is oth
yu yu yu yu yu yu yu yu yu yu yu yu yu
er than temporary. The write-
yu yu yu yu
down amounts to a prediction that the future fair value of the investment will not
yu yu yu yu yu yu yu yu yu yu yu yu yu yu y
rise above the current carrying amount. If a company deems the decline to be te
u yu yu yu yu yu yu yu yu yu yu yu yu yu yu
mporary, it does not write down the investment, and a loss is not recognized in it
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
s income statement. If the decline is deemed to be other than temporary, the inv
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
estment is written down and a loss is reported. Companies can use this flexibility to
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
decide whether to recognize a loss in the current year or to postpone it to a future
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year. yu
6. Under the equity method, an investor recognizes its share of the earnings or losses of
yu yu yu yu yu yu yu yu yu yu yu yu yu yu y
an investee in the periods for which they are reported by the investee in its financial
u yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu y
statements. FASB ASC 323-10-35-7 states that “Intra-
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entity profits and losses shall be eliminated until realized by the investor or investee as
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
if the investee were consolidated.” These intercompany items are eliminated to avoid
yu yu yu yu yu yu yu yu yu yu yu yu y
double counting and prematurely recognizing income.
u yu yu yu yu yu
2023
1-2 Advancedy u Accounting,y u5thyuEditio
n
, 7. FASB ASC 323-10- yu yu
15 requires the use of the equity method of accounting for an investor whose invest
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
ment in voting stock gives it the ability to exercise significant influence over operating
yu yu yu yu yu yu yu yu yu yu yu yu yu y
and financial policies of an investee. Section 15-
u yu yu yu yu yu yu yu
6 states that “Ability to exercise significant influence over operating and financial polici
yu yu yu yu yu yu yu yu yu yu yu yu
es of an investee may be indicated in several ways, including the following: Represent
yu yu yu yu yu yu yu yu yu yu yu yu yu
ation on the board of directors, Participation in policy-
yu yu yu yu yu yu yu yu
making processes, Material intra- yu yu yu
entity transactions, change of managerial personnel, Technological dependency, and Ex
yu yu yu yu yu yu yu yu yu
tent of ownership by an investor in relation to the concentration of other shareholdin
yu yu yu yu yu yu yu yu yu yu yu yu yu
gs (but substantial or majority ownership of the voting stock of an investee by anoth
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
er investor does not necessarily preclude the ability to exercise significant influence b
yu yu yu yu yu yu yu yu yu yu yu yu
y the investor)” (emphasis added). It is clear, in this case, that the investee is criticall
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
y dependent upon the technology licensed to it by the investor. The investor should,
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
therefore, account for its investment using the equity method.
yu yu yu yu yu yu yu yu
8. Even though the investor owns 30% of the investee, it should not use the equity met
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
hod as it cannot exert significant influence over the investee. Further, since the investe
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e is not a public company (all of the remaining stock is privately held), the investor sho
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
uld use the cost method to account for this investment as the fair value method pres
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
umes a publicly traded stock with sufficient liquidity to reasonably determine a fair v
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alue.
9. a. The losses did not affect Enron’s income statement. Since the investees were insol
y u yu yu yu yu yu yu yu yu yu yu yu yu
vent, Enron’s Equity Investment was reduced to zero (it had not made any loans o
yu yu yu yu yu yu yu yu yu yu yu yu yu yu
r other advances to the investee companies). As a result, Enron discontinued repo
yu yu yu yu yu yu yu yu yu yu yu yu
rting for these Equity Investments using the equity method and, therefore, did no
yu yu yu yu yu yu yu yu yu yu yu yu
t recognize its proportionate share of investee losses.
yu yu yu yu yu yu yu
b. “… only after its share of that net income equals the share of net losses not recogniz
yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu yu
ed during the period the equity method was suspended” means that the investee
yu yu yu yu yu yu yu yu yu yu yu yu y
has recouped all of the losses that have been reported. Since the investor ceases
u yu yu yu yu yu yu yu yu yu yu yu yu yu y
to account for its Equity Investment using the equity method once the balance re
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aches zero (assuming that it has not guaranteed the debts of the investee compa
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ny), this generally implies that the investee’s Stockholders’ Equity is below zero (i.e.
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, a deficit). The investor resumes its accounting for the Equity investment using th
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e equity method once the investee’s Stockholders’ Equity is positive. It is at that
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point when the investee company has recouped all of its prior losses (assuming th
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at the investee company has not raised additional equity capital).
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2023
Solutionsy uManual,yuChaptery 1-3
u1
