Solution Manual for Advanced
Accounting 15th Edition By Joe Ben
Hoyle, Thomas Schaefer And Timothy
Chapter 1: The Equity Method of Accounting for Investments
1. Under the equity method, the investor recognizes income from the investee
when:
A) The investee declares a dividend
B) The investee reports earnings on its income statement
C) The investor sells the investment
D) The fair value of the investment increases
Answer: B – Under the equity method, the investor accrues investee income
when it is reported in the investee's financial statements. Dividends declared by
the investee reduce the carrying amount of the investment account, not income.
2. The equity method is generally applicable when the investor owns what
percentage of the investee's voting stock?
A) Less than 20%
B) 20% to 50%
C) More than 50%
D) Exactly 100%
Answer: B – GAAP presumes the equity method is applicable if 20 to 50 percent
of the outstanding voting stock of the investee is held by the investor.
3. Under the fair value method, the investor recognizes income when:
A) The investee reports earnings
B) The investee declares a dividend
C) The investment is sold
D) The investee's stock price increases
,Answer: B – Under the fair value method, the investor recognizes income when
the investee declares a dividend. Portfolios are reported at fair value, but
dividend income is recognized upon declaration.
4. When an investor switches from the fair value method to the equity method
due to achieving significant influence, the change is applied:
A) Retrospectively
B) Prospectively
C) As a prior period adjustment
D) By restating all prior years
Answer: B – When the ability to exercise significant influence occurs following a
series of stock purchases, the investor applies the equity method prospectively.
5. Under the equity method, dividends received from the investee are recorded
as:
A) Dividend income
B) A reduction in the investment account
C) An increase in the investment account
D) A liability
Answer: B – Dividends declared by the investee create a reduction in the carrying
amount of the investment account.
6. Which of the following indicates the ability to exercise significant influence
over an investee?
A) Owning 15% of the voting stock
B) Having representation on the board of directors
C) Having no participation in policy-making
D) Owning bonds of the investee
Answer: B – Significant influence is indicated by several factors including
representation on the board of directors, participation in policy-making, and
other factors.
,7. Under the equity method, the investment account is adjusted for:
A) Only dividends received
B) Only the investee's net income
C) All changes in the equity of the investee company
D) Changes in fair value only
Answer: C – The investor adjusts the investment account to reflect all changes in
the equity of the investee company.
8. The fair value option for equity investments:
A) Can be elected and later revoked
B) Once taken, is irrevocable
C) Is only available for investments under 20%
D) Is required for all equity investments
Answer: B – Current financial reporting standards allow firms to elect to use fair
value for any new investment in equity shares. However, the option, once taken,
is irrevocable.
9. If an investor owns 15% of an investee's voting stock but has significant
influence, which method should be used?
A) Fair value method
B) Cost method
C) Equity method
D) Consolidation
Answer: C – Although the 20-50% presumption exists, significant influence can
still be present below 20% based on other factors like board representation, and
the equity method would apply.
10. When an investee reports a net loss, the investor using the equity method
should:
, A) Ignore the loss
B) Reduce the investment account and recognize a loss
C) Increase the investment account
D) Record a dividend
Answer: B – The investor adjusts the investment account to reflect all changes in
the equity of the investee, including losses, and accrues investee income or loss
when reported.
Chapter 2: Consolidation of Financial Information
11. At the date of an acquisition which is not a bargain purchase, the acquisition
method:
A) Consolidates the subsidiary's assets at fair value and liabilities at book value
B) Consolidates all subsidiary assets and liabilities at book value
C) Consolidates all subsidiary assets and liabilities at fair value
D) Consolidates current assets and liabilities at book value, long-term assets and
liabilities at fair value
Answer: C – Under the acquisition method for a business combination, all
subsidiary assets and liabilities are consolidated at fair value.
12. In an acquisition where control is achieved, consolidation entries are
recorded in:
A) The parent's general journal
B) The subsidiary's general journal
C) A worksheet
D) Both companies' general journals
Answer: C – Entries for the consolidation of the parent and subsidiary are
recorded in a worksheet, not in the general journals of either company.
13. Using the acquisition method for a business combination, goodwill is
generally defined as:
Accounting 15th Edition By Joe Ben
Hoyle, Thomas Schaefer And Timothy
Chapter 1: The Equity Method of Accounting for Investments
1. Under the equity method, the investor recognizes income from the investee
when:
A) The investee declares a dividend
B) The investee reports earnings on its income statement
C) The investor sells the investment
D) The fair value of the investment increases
Answer: B – Under the equity method, the investor accrues investee income
when it is reported in the investee's financial statements. Dividends declared by
the investee reduce the carrying amount of the investment account, not income.
2. The equity method is generally applicable when the investor owns what
percentage of the investee's voting stock?
A) Less than 20%
B) 20% to 50%
C) More than 50%
D) Exactly 100%
Answer: B – GAAP presumes the equity method is applicable if 20 to 50 percent
of the outstanding voting stock of the investee is held by the investor.
3. Under the fair value method, the investor recognizes income when:
A) The investee reports earnings
B) The investee declares a dividend
C) The investment is sold
D) The investee's stock price increases
,Answer: B – Under the fair value method, the investor recognizes income when
the investee declares a dividend. Portfolios are reported at fair value, but
dividend income is recognized upon declaration.
4. When an investor switches from the fair value method to the equity method
due to achieving significant influence, the change is applied:
A) Retrospectively
B) Prospectively
C) As a prior period adjustment
D) By restating all prior years
Answer: B – When the ability to exercise significant influence occurs following a
series of stock purchases, the investor applies the equity method prospectively.
5. Under the equity method, dividends received from the investee are recorded
as:
A) Dividend income
B) A reduction in the investment account
C) An increase in the investment account
D) A liability
Answer: B – Dividends declared by the investee create a reduction in the carrying
amount of the investment account.
6. Which of the following indicates the ability to exercise significant influence
over an investee?
A) Owning 15% of the voting stock
B) Having representation on the board of directors
C) Having no participation in policy-making
D) Owning bonds of the investee
Answer: B – Significant influence is indicated by several factors including
representation on the board of directors, participation in policy-making, and
other factors.
,7. Under the equity method, the investment account is adjusted for:
A) Only dividends received
B) Only the investee's net income
C) All changes in the equity of the investee company
D) Changes in fair value only
Answer: C – The investor adjusts the investment account to reflect all changes in
the equity of the investee company.
8. The fair value option for equity investments:
A) Can be elected and later revoked
B) Once taken, is irrevocable
C) Is only available for investments under 20%
D) Is required for all equity investments
Answer: B – Current financial reporting standards allow firms to elect to use fair
value for any new investment in equity shares. However, the option, once taken,
is irrevocable.
9. If an investor owns 15% of an investee's voting stock but has significant
influence, which method should be used?
A) Fair value method
B) Cost method
C) Equity method
D) Consolidation
Answer: C – Although the 20-50% presumption exists, significant influence can
still be present below 20% based on other factors like board representation, and
the equity method would apply.
10. When an investee reports a net loss, the investor using the equity method
should:
, A) Ignore the loss
B) Reduce the investment account and recognize a loss
C) Increase the investment account
D) Record a dividend
Answer: B – The investor adjusts the investment account to reflect all changes in
the equity of the investee, including losses, and accrues investee income or loss
when reported.
Chapter 2: Consolidation of Financial Information
11. At the date of an acquisition which is not a bargain purchase, the acquisition
method:
A) Consolidates the subsidiary's assets at fair value and liabilities at book value
B) Consolidates all subsidiary assets and liabilities at book value
C) Consolidates all subsidiary assets and liabilities at fair value
D) Consolidates current assets and liabilities at book value, long-term assets and
liabilities at fair value
Answer: C – Under the acquisition method for a business combination, all
subsidiary assets and liabilities are consolidated at fair value.
12. In an acquisition where control is achieved, consolidation entries are
recorded in:
A) The parent's general journal
B) The subsidiary's general journal
C) A worksheet
D) Both companies' general journals
Answer: C – Entries for the consolidation of the parent and subsidiary are
recorded in a worksheet, not in the general journals of either company.
13. Using the acquisition method for a business combination, goodwill is
generally defined as:
