Advanced Accounting,
JO
5th Edition
JO
by Patrick Hopkins and Halsey
JO JO JO JO
, Advanced Accounting Fift JO JO
h Edition JO
By Patrick E. Hopkins and Robert F. Halsey
JO JO JO JO JO JO JO
Solution Manual JO
Chapter 1— Accounting for Intercorporate Investments
JO JO JO JO JO
1. a. If the investor acquired 100% of the investee at book value, the Equity Investmen
J O JO JO JO JO JO JO JO JO JO JO JO JO JO
t account is equal to the Stockholders’ Equity of the investee company. It, therefo
JO JO JO JO JO JO JO JO JO JO JO JO JO
re, includes the assets and liabilities of the investee company in one account. The
JO JO JO JO JO JO JO JO JO JO JO JO JO J
investor’s balance sheet, therefore, includes the Stockholders’ Equity of the invest
O JO JO JO JO JO JO JO JO JO JO
ee company, and, implicitly, its assets and liabilities. In the consolidation process,
JO JO JO JO JO JO JO JO JO JO JO JO
the balance sheets of the investor and investee company are brought together. C
JO JO JO JO JO JO JO JO JO JO JO JO
onsolidated Stockholders’ Equity will be the same as that which the investor curre
JO JO JO JO JO JO JO JO JO JO JO JO
ntly reports; only total assets and total liabilities will change.
JO JO JO JO JO JO JO JO JO
b. If the investor owns 100% of the investee, the equity income that the investor repor
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ts is equal to the net income of the investee, thus implicitly including its revenues
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
and expenses. Replacing the equity income with the revenues and expenses of th
JO JO JO JO JO JO JO JO JO JO JO JO JO
e investee company in the consolidation process will yield the same net income.
JO JO JO JO JO JO JO JO JO JO JO JO
2. FASB ASC 323- J O J O
10 provides the following guidance with respect to the accounting for receipt
J O J O J O J O J O J O J O JO J O J O JO JO
of dividends using the equity method:
JO JO JO JO JO
The equity method tends to be most appropriate if an investment enables the
JO JO JO JO JO JO JO JO JO JO JO JO J
investor to influence the operating or financial decisions of the investee. The i
O JO JO JO JO JO JO JO JO JO JO JO JO
nvestor then has a degree of responsibility for the return on its investment, a
JO JO JO JO JO JO JO JO JO JO JO JO JO
nd it is appropriate to include in the results of operations of the investor its s
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
hare of the earnings or losses of the investee. (¶323-10-05-5)
JO JO JO JO JO JO JO JO JO
The equity method is an appropriate means of recognizing increases or decreases me
JO JO JO JO JO JO JO JO JO JO JO JO
asured by generally accepted accounting principles (GAAP) in the economic resources
JO JO JO JO JO JO JO JO JO JO JO
underlying the investments. Furthermore, the equity method of accounting more close
JO JO JO JO JO JO JO JO JO JO
ly meets the objectives of accrual accounting than does the cost method because the
JO JO JO JO JO JO JO JO JO JO JO JO JO
investor recognizes its share of the earnings and losses of the investee in the period
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
s in which they are reflected in the accounts of the investee. (¶323-10-05-4)
JO JO JO JO JO JO JO JO JO JO JO JO
Under the equity method, an investor shall recognize its share of the earnings or loss
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
es of an investee in the periods for which they are reported by the investee in its fin
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ancial statements rather than in the period in which an investee declares a dividend (
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
¶323-10- 35-4). JO
2023
SolutionsJOManual,JOChapterJ 1-1
O1
,3. The recognition of equity income does not mean that cash has been received. In fact,
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
dividends paid by the investee to the investor are typically a small percentage of its
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
reported net income. The projection of future net income that includes equity income
JO JO JO JO JO JO JO JO JO JO JO JO J
Oas a significant component might not, therefore, imply significant generation of cash.
JO JO JO JO JO JO JO JO JO JO JO
4. The accounting for Altria’s investment in ABI depends on the degree of influence or c
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ontrol it can exert over that company. A classification of “no influence” does not appe
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ar appropriate since Altria owns 10.1% of the outstanding common stock and also “a
JO JO JO JO JO JO JO JO JO JO JO JO JO
ctive representation on ABI’s Board of Directors (“ABI Board”) and certain ABI Board
JO JO JO JO JO JO JO JO JO JO JO JO JO
committees. Through this representation, Altria participates in ABI policy making proc
JO JO JO JO JO JO JO JO JO JO
esses.” A classification of “significant influence” seems most appropriate given the fac
JO JO JO JO JO JO JO JO JO JO JO
ts, and this classification warrants accounting for the investment using the equity met
JO JO JO JO JO JO JO JO JO JO JO JO
hod of accounting.
JO JO
5. a. An investor may write down the carrying amount of its Equity Investment if the f
J O JO JO JO JO JO JO JO JO JO JO JO JO JO JO
air value of that investment has declined below its carrying value and that decline
JO JO JO JO JO JO JO JO JO JO JO JO JO
is deemed to be other than temporary.
JO JO JO JO JO JO JO
b. There is considerable judgment in determining whether a decline in fair value is oth
JO JO JO JO JO JO JO JO JO JO JO JO JO
er than temporary. The write-
JO JO JO JO
down amounts to a prediction that the future fair value of the investment will not
JO JO JO JO JO JO JO JO JO JO JO JO JO JO J
rise above the current carrying amount. If a company deems the decline to be te
O JO JO JO JO JO JO JO JO JO JO JO JO JO JO
mporary, it does not write down the investment, and a loss is not recognized in it
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
s income statement. If the decline is deemed to be other than temporary, the inv
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
estment is written down and a loss is reported. Companies can use this flexibility to
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
decide whether to recognize a loss in the current year or to postpone it to a future
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
year. JO
6. Under the equity method, an investor recognizes its share of the earnings or losses of
JO JO JO JO JO JO JO JO JO JO JO JO JO JO J
an investee in the periods for which they are reported by the investee in its financial
O JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
statements. FASB ASC 323-10-35-7 states that “Intra-
JO JO JO JO JO JO JO
entity profits and losses shall be eliminated until realized by the investor or investee as
JO JO JO JO JO JO JO JO JO JO JO JO JO JO J
if the investee were consolidated.” These intercompany items are eliminated to avoid
O JO JO JO JO JO JO JO JO JO JO JO J
double counting and prematurely recognizing income.
O JO JO JO JO JO
2023
1-2 AdvancedJO Accounting,JO5thJOEditio
n
, 7. FASB ASC 323-10- JO JO
15 requires the use of the equity method of accounting for an investor whose invest
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ment in voting stock gives it the ability to exercise significant influence over operating
JO JO JO JO JO JO JO JO JO JO JO JO JO J
and financial policies of an investee. Section 15-
O JO JO JO JO JO JO JO
6 states that “Ability to exercise significant influence over operating and financial polici
JO JO JO JO JO JO JO JO JO JO JO JO
es of an investee may be indicated in several ways, including the following: Represent
JO JO JO JO JO JO JO JO JO JO JO JO JO
ation on the board of directors, Participation in policy-
JO JO JO JO JO JO JO JO
making processes, Material intra- JO JO JO
entity transactions, change of managerial personnel, Technological dependency, and Ex
JO JO JO JO JO JO JO JO JO
tent of ownership by an investor in relation to the concentration of other shareholdin
JO JO JO JO JO JO JO JO JO JO JO JO JO
gs (but substantial or majority ownership of the voting stock of an investee by anoth
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
er investor does not necessarily preclude the ability to exercise significant influence b
JO JO JO JO JO JO JO JO JO JO JO JO
y the investor)” (emphasis added). It is clear, in this case, that the investee is criticall
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
y dependent upon the technology licensed to it by the investor. The investor should,
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
therefore, account for its investment using the equity method.
JO JO JO JO JO JO JO JO
8. Even though the investor owns 30% of the investee, it should not use the equity met
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
hod as it cannot exert significant influence over the investee. Further, since the investe
JO JO JO JO JO JO JO JO JO JO JO JO JO
e is not a public company (all of the remaining stock is privately held), the investor sho
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
uld use the cost method to account for this investment as the fair value method pres
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
umes a publicly traded stock with sufficient liquidity to reasonably determine a fair v
JO JO JO JO JO JO JO JO JO JO JO JO JO
alue.
9. a. The losses did not affect Enron’s income statement. Since the investees were insol
J O JO JO JO JO JO JO JO JO JO JO JO JO
vent, Enron’s Equity Investment was reduced to zero (it had not made any loans
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
or other advances to the investee companies). As a result, Enron discontinued rep
JO JO JO JO JO JO JO JO JO JO JO JO
orting for these Equity Investments using the equity method and, therefore, did n
JO JO JO JO JO JO JO JO JO JO JO JO
ot recognize its proportionate share of investee losses.
JO JO JO JO JO JO JO
b. “… only after its share of that net income equals the share of net losses not recogniz
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ed during the period the equity method was suspended” means that the investee
JO JO JO JO JO JO JO JO JO JO JO JO J
has recouped all of the losses that have been reported. Since the investor ceases
O JO JO JO JO JO JO JO JO JO JO JO JO JO J
to account for its Equity Investment using the equity method once the balance re
O JO JO JO JO JO JO JO JO JO JO JO JO JO
aches zero (assuming that it has not guaranteed the debts of the investee compa
JO JO JO JO JO JO JO JO JO JO JO JO JO
ny), this generally implies that the investee’s Stockholders’ Equity is below zero (i.e.
JO JO JO JO JO JO JO JO JO JO JO JO
, a deficit). The investor resumes its accounting for the Equity investment using th
JO JO JO JO JO JO JO JO JO JO JO JO JO
e equity method once the investee’s Stockholders’ Equity is positive. It is at that
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
point when the investee company has recouped all of its prior losses (assuming th
JO JO JO JO JO JO JO JO JO JO JO JO JO
at the investee company has not raised additional equity capital).
JO JO JO JO JO JO JO JO JO
2023
SolutionsJOManual,JOChapterJ 1-3
O1
JO
5th Edition
JO
by Patrick Hopkins and Halsey
JO JO JO JO
, Advanced Accounting Fift JO JO
h Edition JO
By Patrick E. Hopkins and Robert F. Halsey
JO JO JO JO JO JO JO
Solution Manual JO
Chapter 1— Accounting for Intercorporate Investments
JO JO JO JO JO
1. a. If the investor acquired 100% of the investee at book value, the Equity Investmen
J O JO JO JO JO JO JO JO JO JO JO JO JO JO
t account is equal to the Stockholders’ Equity of the investee company. It, therefo
JO JO JO JO JO JO JO JO JO JO JO JO JO
re, includes the assets and liabilities of the investee company in one account. The
JO JO JO JO JO JO JO JO JO JO JO JO JO J
investor’s balance sheet, therefore, includes the Stockholders’ Equity of the invest
O JO JO JO JO JO JO JO JO JO JO
ee company, and, implicitly, its assets and liabilities. In the consolidation process,
JO JO JO JO JO JO JO JO JO JO JO JO
the balance sheets of the investor and investee company are brought together. C
JO JO JO JO JO JO JO JO JO JO JO JO
onsolidated Stockholders’ Equity will be the same as that which the investor curre
JO JO JO JO JO JO JO JO JO JO JO JO
ntly reports; only total assets and total liabilities will change.
JO JO JO JO JO JO JO JO JO
b. If the investor owns 100% of the investee, the equity income that the investor repor
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ts is equal to the net income of the investee, thus implicitly including its revenues
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
and expenses. Replacing the equity income with the revenues and expenses of th
JO JO JO JO JO JO JO JO JO JO JO JO JO
e investee company in the consolidation process will yield the same net income.
JO JO JO JO JO JO JO JO JO JO JO JO
2. FASB ASC 323- J O J O
10 provides the following guidance with respect to the accounting for receipt
J O J O J O J O J O J O J O JO J O J O JO JO
of dividends using the equity method:
JO JO JO JO JO
The equity method tends to be most appropriate if an investment enables the
JO JO JO JO JO JO JO JO JO JO JO JO J
investor to influence the operating or financial decisions of the investee. The i
O JO JO JO JO JO JO JO JO JO JO JO JO
nvestor then has a degree of responsibility for the return on its investment, a
JO JO JO JO JO JO JO JO JO JO JO JO JO
nd it is appropriate to include in the results of operations of the investor its s
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
hare of the earnings or losses of the investee. (¶323-10-05-5)
JO JO JO JO JO JO JO JO JO
The equity method is an appropriate means of recognizing increases or decreases me
JO JO JO JO JO JO JO JO JO JO JO JO
asured by generally accepted accounting principles (GAAP) in the economic resources
JO JO JO JO JO JO JO JO JO JO JO
underlying the investments. Furthermore, the equity method of accounting more close
JO JO JO JO JO JO JO JO JO JO
ly meets the objectives of accrual accounting than does the cost method because the
JO JO JO JO JO JO JO JO JO JO JO JO JO
investor recognizes its share of the earnings and losses of the investee in the period
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
s in which they are reflected in the accounts of the investee. (¶323-10-05-4)
JO JO JO JO JO JO JO JO JO JO JO JO
Under the equity method, an investor shall recognize its share of the earnings or loss
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
es of an investee in the periods for which they are reported by the investee in its fin
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ancial statements rather than in the period in which an investee declares a dividend (
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
¶323-10- 35-4). JO
2023
SolutionsJOManual,JOChapterJ 1-1
O1
,3. The recognition of equity income does not mean that cash has been received. In fact,
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
dividends paid by the investee to the investor are typically a small percentage of its
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
reported net income. The projection of future net income that includes equity income
JO JO JO JO JO JO JO JO JO JO JO JO J
Oas a significant component might not, therefore, imply significant generation of cash.
JO JO JO JO JO JO JO JO JO JO JO
4. The accounting for Altria’s investment in ABI depends on the degree of influence or c
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ontrol it can exert over that company. A classification of “no influence” does not appe
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ar appropriate since Altria owns 10.1% of the outstanding common stock and also “a
JO JO JO JO JO JO JO JO JO JO JO JO JO
ctive representation on ABI’s Board of Directors (“ABI Board”) and certain ABI Board
JO JO JO JO JO JO JO JO JO JO JO JO JO
committees. Through this representation, Altria participates in ABI policy making proc
JO JO JO JO JO JO JO JO JO JO
esses.” A classification of “significant influence” seems most appropriate given the fac
JO JO JO JO JO JO JO JO JO JO JO
ts, and this classification warrants accounting for the investment using the equity met
JO JO JO JO JO JO JO JO JO JO JO JO
hod of accounting.
JO JO
5. a. An investor may write down the carrying amount of its Equity Investment if the f
J O JO JO JO JO JO JO JO JO JO JO JO JO JO JO
air value of that investment has declined below its carrying value and that decline
JO JO JO JO JO JO JO JO JO JO JO JO JO
is deemed to be other than temporary.
JO JO JO JO JO JO JO
b. There is considerable judgment in determining whether a decline in fair value is oth
JO JO JO JO JO JO JO JO JO JO JO JO JO
er than temporary. The write-
JO JO JO JO
down amounts to a prediction that the future fair value of the investment will not
JO JO JO JO JO JO JO JO JO JO JO JO JO JO J
rise above the current carrying amount. If a company deems the decline to be te
O JO JO JO JO JO JO JO JO JO JO JO JO JO JO
mporary, it does not write down the investment, and a loss is not recognized in it
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
s income statement. If the decline is deemed to be other than temporary, the inv
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
estment is written down and a loss is reported. Companies can use this flexibility to
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
decide whether to recognize a loss in the current year or to postpone it to a future
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
year. JO
6. Under the equity method, an investor recognizes its share of the earnings or losses of
JO JO JO JO JO JO JO JO JO JO JO JO JO JO J
an investee in the periods for which they are reported by the investee in its financial
O JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
statements. FASB ASC 323-10-35-7 states that “Intra-
JO JO JO JO JO JO JO
entity profits and losses shall be eliminated until realized by the investor or investee as
JO JO JO JO JO JO JO JO JO JO JO JO JO JO J
if the investee were consolidated.” These intercompany items are eliminated to avoid
O JO JO JO JO JO JO JO JO JO JO JO J
double counting and prematurely recognizing income.
O JO JO JO JO JO
2023
1-2 AdvancedJO Accounting,JO5thJOEditio
n
, 7. FASB ASC 323-10- JO JO
15 requires the use of the equity method of accounting for an investor whose invest
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ment in voting stock gives it the ability to exercise significant influence over operating
JO JO JO JO JO JO JO JO JO JO JO JO JO J
and financial policies of an investee. Section 15-
O JO JO JO JO JO JO JO
6 states that “Ability to exercise significant influence over operating and financial polici
JO JO JO JO JO JO JO JO JO JO JO JO
es of an investee may be indicated in several ways, including the following: Represent
JO JO JO JO JO JO JO JO JO JO JO JO JO
ation on the board of directors, Participation in policy-
JO JO JO JO JO JO JO JO
making processes, Material intra- JO JO JO
entity transactions, change of managerial personnel, Technological dependency, and Ex
JO JO JO JO JO JO JO JO JO
tent of ownership by an investor in relation to the concentration of other shareholdin
JO JO JO JO JO JO JO JO JO JO JO JO JO
gs (but substantial or majority ownership of the voting stock of an investee by anoth
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
er investor does not necessarily preclude the ability to exercise significant influence b
JO JO JO JO JO JO JO JO JO JO JO JO
y the investor)” (emphasis added). It is clear, in this case, that the investee is criticall
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
y dependent upon the technology licensed to it by the investor. The investor should,
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
therefore, account for its investment using the equity method.
JO JO JO JO JO JO JO JO
8. Even though the investor owns 30% of the investee, it should not use the equity met
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
hod as it cannot exert significant influence over the investee. Further, since the investe
JO JO JO JO JO JO JO JO JO JO JO JO JO
e is not a public company (all of the remaining stock is privately held), the investor sho
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
uld use the cost method to account for this investment as the fair value method pres
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
umes a publicly traded stock with sufficient liquidity to reasonably determine a fair v
JO JO JO JO JO JO JO JO JO JO JO JO JO
alue.
9. a. The losses did not affect Enron’s income statement. Since the investees were insol
J O JO JO JO JO JO JO JO JO JO JO JO JO
vent, Enron’s Equity Investment was reduced to zero (it had not made any loans
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
or other advances to the investee companies). As a result, Enron discontinued rep
JO JO JO JO JO JO JO JO JO JO JO JO
orting for these Equity Investments using the equity method and, therefore, did n
JO JO JO JO JO JO JO JO JO JO JO JO
ot recognize its proportionate share of investee losses.
JO JO JO JO JO JO JO
b. “… only after its share of that net income equals the share of net losses not recogniz
JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO JO
ed during the period the equity method was suspended” means that the investee
JO JO JO JO JO JO JO JO JO JO JO JO J
has recouped all of the losses that have been reported. Since the investor ceases
O JO JO JO JO JO JO JO JO JO JO JO JO JO J
to account for its Equity Investment using the equity method once the balance re
O JO JO JO JO JO JO JO JO JO JO JO JO JO
aches zero (assuming that it has not guaranteed the debts of the investee compa
JO JO JO JO JO JO JO JO JO JO JO JO JO
ny), this generally implies that the investee’s Stockholders’ Equity is below zero (i.e.
JO JO JO JO JO JO JO JO JO JO JO JO
, a deficit). The investor resumes its accounting for the Equity investment using th
JO JO JO JO JO JO JO JO JO JO JO JO JO
e equity method once the investee’s Stockholders’ Equity is positive. It is at that
JO JO JO JO JO JO JO JO JO JO JO JO JO JO
point when the investee company has recouped all of its prior losses (assuming th
JO JO JO JO JO JO JO JO JO JO JO JO JO
at the investee company has not raised additional equity capital).
JO JO JO JO JO JO JO JO JO
2023
SolutionsJOManual,JOChapterJ 1-3
O1
