2-1
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Hillx#LLC.
,Solution Manual For All Chapters
x# x# x# x#
SOLUTION MANUAL FOR x# x#
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAE
x# x# x# x# x# x# x# x# x#
FER AND TIMOTHY DOUPNIK
x# x# x#
CHAPTER 1-19 x#
CHAPTER 1 TH x# x#
E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
x# x# x# x# x# x#
Chapter Outline x#
I. Four methods are principally used to account for an investment in equity securities al
x# x# x# x# x# x# x# x# x# x# x# x# x#
ong with a fair value option.
x# x# x# x# x#
A. Fair value method: applied by an investor when only a small percentage
x# x# x# x# x# x# x# x# x# x# x# x#
of a company‘s voting stock is held.
x# x# x# x# x# x#
1. The investor recognizes income when the investee declares a dividend.
x# x# x# x# x# x# x# x# x#
2. Portfolios are reported at fair value. If fair values are unavailable, investmen
x# x# x# x# x# x# x# x# x# x# x#
t is reported at cost.
x# x# x# x#
B. Cost Method: applied to investments without a readily determinable fair value. Wh
x# x# x# x# x# x# x# x# x# x# x#
en the fair value of an investment in equity securities is not readily determinable, a
x# x# x# x# x# x# x# x# x# x# x# x# x# x#
nd the investment provides neither significant influence nor control, the investment
x# x# x# x# x# x# x# x# x# x# x
may be measured at cost. The investment remains at cost unless
# x# x# x# x# x# x# x# x# x# x#
1. A demonstrable impairment occurs for the investment, or
x# x# x# x# x# x# x#
2. An observable price change occurs for identical or similar investments of the sa
x# x# x# x# x# x# x# x# x# x# x# x#
me issuer. x#
The investor typically recognizes its share of investee dividends declared as dividen
x# x# x# x# x# x# x# x# x# x# x#
d income.
x#
C. Consolidation: when one firm controls another (e.g., when a parent has a majori
x# x# x# x# x# x# x# x# x# x# x# x#
ty interest in the voting stock of a subsidiary or control through variable interests
x# x# x# x# x# x# x# x# x# x# x# x# x#
, their financial statements are consolidated and reported for the combined entit
x# x# x# x# x# x# x# x# x# x# x#
y.
D. Equity method: applied when the investor has the ability to exercise signific
x# x# x# x# x# x# x# x# x# x# x#
ant influence over operating and financial policies of the investee.
x# x# x# x# x# x# x# x# x#
1. Ability to significantly influence investee is indicated by several factors includi
x# x# x# x# x# x# x# x# x# x#
ng representation on the board of directors, participation in policy-
x# x# x# x# x# x# x# x# x#
making, etc. x#
2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
x# x# x# x# x# x# x# x# x# x# x# x# x# x#
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, outstanding voting stock of the investee is held by the investor.
x# x# x# x# x# x# x# x# x# x#
Current financial reporting standards allow firms to elect to use fair value for any new i
x# x# x# x# x# x# x# x# x# x# x# x# x# x# x#
nvestment in equity shares including those where the equity method would otherwise a
x# x# x# x# x# x# x# x# x# x# x# x#
pply. However, the option, once taken, is irrevocable. The investor recognizes both inv
x# x# x# x# x# x# x# x# x# x# x# x#
estee dividends and changes in fair value over time as income.
x# x# x# x# x# x# x# x# x# x#
II. Accounting for an investment: the equity method
x# x# x# x# x# x#
A. The investor adjusts the investment account to reflect all changes in the equity of
x# x# x# x# x# x# x# x# x# x# x# x# x# x#
the investee company.
x# x#
B. The investor accrues investee income when it is reported in the investee‘s finan
x# x# x# x# x# x# x# x# x# x# x# x#
cial statements.
x#
C. Dividends declared by the investee create a reduction in the carrying amount of th
x# x# x# x# x# x# x# x# x# x# x# x# x#
e Investment account. This book assumes all investee dividends are declared and
x# x# x# x# x# x# x# x# x# x# x# x
paid in the same reporting period.
# x# x# x# x# x#
III. Special accounting procedures used in the application of the equity method
x# x# x# x# x# x# x# x# x# x#
A. Reporting a change to the equity method when the ability to significantly influence
x# x# x# x# x# x# x# x# x# x# x# x# x
an investee is achieved through a series of acquisitions.
# x# x# x# x# x# x# x# x#
1. Initial purchase(s) will be accounted for by means of the fair value method (o
x# x# x# x# x# x# x# x# x# x# x# x# x#
r at cost) until the ability to significantly influence is attained.
x# x# x# x# x# x# x# x# x# x#
2. When the ability to exercise significant influence occurs following a series of st
x# x# x# x# x# x# x# x# x# x# x# x#
ock purchases, the investor applies the equity method prospectively. The total
x# x# x# x# x# x# x# x# x# x# x#
fair value at the date significant influence is attained is compared to the invest
x# x# x# x# x# x# x# x# x# x# x# x# x#
ee‘s book value to determine future excess fair value amortizations.
x# x# x# x# x# x# x# x# x#
B. Investee income from other than continuing operations
x# x# x# x# x# x#
1. The investor recognizes its share of investee reported other comprehensi
x# x# x# x# x# x# x# x# x#
ve income (OCI) through the investment account and the investor‘s own
x# x# x# x# x# x# x# x# x# x# x#
OCI.
2. Income items such as discontinued operations that are reported separately by t
x# x# x# x# x# x# x# x# x# x# x#
he investee should be shown in the same manner by the investor. The materia
x# x# x# x# x# x# x# x# x# x# x# x# x#
lity of these other investee income elements (as it affects the investor) continue
x# x# x# x# x# x# x# x# x# x# x# x#
s to be a criterion for separate disclosure.
x# x# x# x# x# x# x#
C. Investee losses x#
1. Losses reported by the investee create corresponding losses for the investor.
x# x# x# x# x# x# x# x# x# x#
2. A permanent decline in the fair value of an investee‘s stock should be recogni
x# x# x# x# x# x# x# x# x# x# x# x# x#
zed immediately by the investor as an impairment loss.
x# x# x# x# x# x# x# x#
3. Investee losses can possibly reduce the carrying value of the investment accou
x# x# x# x# x# x# x# x# x# x# x#
nt to a zero balance. At that point, the equity method ceases to be applicable a
x# x# x# x# x# x# x# x# x# x# x# x# x# x# x#
nd the fair-value method is subsequently used.
x# x# x# x# x# x#
D. Reporting the sale of an equity investment x# x# x# x# x# x#
1. The investor applies the equity method until the disposal date to establish a pro
x# x# x# x# x# x# x# x# x# x# x# x# x#
per book value. x# x#
2. Following the sale, the equity method continues to be appropriate if enough sha
x# x# x# x# x# x# x# x# x# x# x# x#
res are still held to maintain the investor‘s ability to significantly influence the in
x# x# x# x# x# x# x# x# x# x# x# x# x#
vestee. If that ability has been lost, the fair-value method is subsequently used.
x# x# x# x# x# x# x# x# x# x# x# x#
2-24
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Hillx#LLC.
, Solution Manual For All Chapters
x# x# x# x#
IV. Excess investment cost over book value acquired
x# x# x# x# x# x#
A. The price an investor pays for equity securities often differs significantly from t
x# x# x# x# x# x# x# x# x# x# x# x#
he investee‘s underlying book value primarily because the historical cost bas
x# x# x# x# x# x# x# x# x# x#
ed accounting model does not keep track of changes in a firm‘s fair value.
x# x# x# x# x# x# x# x# x# x# x# x# x#
B. Payments made in excess of underlying book value can sometimes be identified
x# x# x# x# x# x# x# x# x# x# x# x#
with specific investee accounts such as inventory or equipment.
x# x# x# x# x# x# x# x#
C. An extra acquisition price can also be assigned to anticipated benefits that are ex
x# x# x# x# x# x# x# x# x# x# x# x# x#
pected to be derived from the investment. In accounting, these amounts are pres
x# x# x# x# x# x# x# x# x# x# x# x#
umed to reflect an intangible asset referred to as goodwill. Goodwill is calculated
x# x# x# x# x# x# x# x# x# x# x# x# x#
as any excess payment that is not attributable to specific identifiable assets and li
x# x# x# x# x# x# x# x# x# x# x# x# x#
abilities of the investee. Because goodwill is an indefinite-
x# x# x# x# x# x# x# x#
lived asset, it is not amortized.x# x# x# x# x#
V. Deferral of intra-entity gross profit in inventory
x# x# x# x# x# x#
A. The investor‘s share of intra-
x# x# x# x#
entity profits in ending inventory are not recognized until the transferred goods are
x# x# x# x# x# x# x# x# x# x# x# x# x#
either consumed or until they are resold to unrelated parties.
x# x# x# x# x# x# x# x# x#
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 method a
x# x# x# x# x# x# x# x# x# x# x# x#
nd then recognized as income at the time of the inventory‘s eventual disposa
x# x# x# x# x# x# x# x# x# x# x# x#
l.
3. The amount of gross profit to be deferred is the investor‘s ownership percent
x# x# x# x# x# x# x# x# x# x# x# x#
age multiplied by the markup on the merchandise remaining at the end of the
x# x# x# x# x# x# x# x# x# x# x# x# x#
year. x#
C. Upstream sales of inventory x# x# x#
1. ―Upstream‖ refers to transfers made by the investee to the investor. x# x# x# x# x# x# x# x# x# x#
2. Under the equity method, the deferral process for intra-
x# x# x# x# x# x# x# x#
entity gross profits is identical for upstream and downstream transfers. The pro
x# x# x# x# x# x# x# x# x# x# x#
cedures are separately identified in Chapter One because the handling does v
x# x# x# x# x# x# x# x# x# x# x#
ary within the consolidation process. x# x# x# x#
Answers to Discussion Questions x# x# x#
The textbook includes discussion questions to stimulate student thought and discussion. Thes
x# x# x# x# x# x# x# x# x# x# x#
e questions are also designed to allow students to consider relevant issues that might otherwi
x# x# x# x# x# x# x# x# x# x# x# x# x# x#
se be overlooked. Some of these questions may be addressed by the instructor in class to m
x# x# x# x# x# x# x# x# x# x# x# x# x# x# x# x#
otivate student discussion. Students should be encouraged to begin by defining the issue(s) i
x# x# x# x# x# x# x# x# x# x# x# x# x#
n each case. Next, authoritative accounting literature (FASB ASC) or other relevant literature
x# x# x# x# x# x# x# x# x# x# x# x# x#
can be consulted as a preliminary step in arriving at logical actions. Frequently, the FASB Ac
x# x# x# x# x# x# x# x# x# x# x# x# x# x# x#
counting Standards Codification will provide the necessary support.
x# x# x# x# x# x# x#
Unfortunately, in accounting, definitive resolutions to financial reporting questions are not alwa
x# x# x# x# x# x# x# x# x# x# x#
ys available. Students often seem to believe that all accounting issues have been resolved in
x# x# x# x# x# x# x# x# x# x# x# x# x# x# x#
the past so that accounting education is only a matter of learning to apply historically prescrib
x# x# x# x# x# x# x# x# x# x# x# x# x# x# x#
ed procedures. However, in actual practice, the only real answer is often the one that provide
x# x# x# x# x# x# x# x# x# x# x# x# x# x# x#
s the fairest representation of the firm‘s transactions. If an authoritative solution is not availabl
x# x# x# x# x# x# x# x# x# x# x# x# x# x#
e, students should be directed to list all of the issues involved and the consequences of possi
x# x# x# x# x# x# x# x# x# x# x# x# x# x# x# x#
ble alternative actions. The various factors presented can be weighed to produce a viable sol
x# x# x# x# x# x# x# x# x# x# x# x# x# x#
ution.
The discussion questions are designed to help students develop research and critical thinking
x# x# x# x# x# x# x# x# x# x# x# x# x#
2-3
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Hillx#LLC.
©x#McGrawx#Hillx#LLC.x#Allx#rightsx#reserved.x#Nox#reproductionx#orx#distributionx#withoutx#thex#priorx#writtenx#consentx#ofx#McGrawx#
Hillx#LLC.
,Solution Manual For All Chapters
x# x# x# x#
SOLUTION MANUAL FOR x# x#
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAE
x# x# x# x# x# x# x# x# x#
FER AND TIMOTHY DOUPNIK
x# x# x#
CHAPTER 1-19 x#
CHAPTER 1 TH x# x#
E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
x# x# x# x# x# x#
Chapter Outline x#
I. Four methods are principally used to account for an investment in equity securities al
x# x# x# x# x# x# x# x# x# x# x# x# x#
ong with a fair value option.
x# x# x# x# x#
A. Fair value method: applied by an investor when only a small percentage
x# x# x# x# x# x# x# x# x# x# x# x#
of a company‘s voting stock is held.
x# x# x# x# x# x#
1. The investor recognizes income when the investee declares a dividend.
x# x# x# x# x# x# x# x# x#
2. Portfolios are reported at fair value. If fair values are unavailable, investmen
x# x# x# x# x# x# x# x# x# x# x#
t is reported at cost.
x# x# x# x#
B. Cost Method: applied to investments without a readily determinable fair value. Wh
x# x# x# x# x# x# x# x# x# x# x#
en the fair value of an investment in equity securities is not readily determinable, a
x# x# x# x# x# x# x# x# x# x# x# x# x# x#
nd the investment provides neither significant influence nor control, the investment
x# x# x# x# x# x# x# x# x# x# x
may be measured at cost. The investment remains at cost unless
# x# x# x# x# x# x# x# x# x# x#
1. A demonstrable impairment occurs for the investment, or
x# x# x# x# x# x# x#
2. An observable price change occurs for identical or similar investments of the sa
x# x# x# x# x# x# x# x# x# x# x# x#
me issuer. x#
The investor typically recognizes its share of investee dividends declared as dividen
x# x# x# x# x# x# x# x# x# x# x#
d income.
x#
C. Consolidation: when one firm controls another (e.g., when a parent has a majori
x# x# x# x# x# x# x# x# x# x# x# x#
ty interest in the voting stock of a subsidiary or control through variable interests
x# x# x# x# x# x# x# x# x# x# x# x# x#
, their financial statements are consolidated and reported for the combined entit
x# x# x# x# x# x# x# x# x# x# x#
y.
D. Equity method: applied when the investor has the ability to exercise signific
x# x# x# x# x# x# x# x# x# x# x#
ant influence over operating and financial policies of the investee.
x# x# x# x# x# x# x# x# x#
1. Ability to significantly influence investee is indicated by several factors includi
x# x# x# x# x# x# x# x# x# x#
ng representation on the board of directors, participation in policy-
x# x# x# x# x# x# x# x# x#
making, etc. x#
2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
x# x# x# x# x# x# x# x# x# x# x# x# x# x#
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Hillx#LLC.
, outstanding voting stock of the investee is held by the investor.
x# x# x# x# x# x# x# x# x# x#
Current financial reporting standards allow firms to elect to use fair value for any new i
x# x# x# x# x# x# x# x# x# x# x# x# x# x# x#
nvestment in equity shares including those where the equity method would otherwise a
x# x# x# x# x# x# x# x# x# x# x# x#
pply. However, the option, once taken, is irrevocable. The investor recognizes both inv
x# x# x# x# x# x# x# x# x# x# x# x#
estee dividends and changes in fair value over time as income.
x# x# x# x# x# x# x# x# x# x#
II. Accounting for an investment: the equity method
x# x# x# x# x# x#
A. The investor adjusts the investment account to reflect all changes in the equity of
x# x# x# x# x# x# x# x# x# x# x# x# x# x#
the investee company.
x# x#
B. The investor accrues investee income when it is reported in the investee‘s finan
x# x# x# x# x# x# x# x# x# x# x# x#
cial statements.
x#
C. Dividends declared by the investee create a reduction in the carrying amount of th
x# x# x# x# x# x# x# x# x# x# x# x# x#
e Investment account. This book assumes all investee dividends are declared and
x# x# x# x# x# x# x# x# x# x# x# x
paid in the same reporting period.
# x# x# x# x# x#
III. Special accounting procedures used in the application of the equity method
x# x# x# x# x# x# x# x# x# x#
A. Reporting a change to the equity method when the ability to significantly influence
x# x# x# x# x# x# x# x# x# x# x# x# x
an investee is achieved through a series of acquisitions.
# x# x# x# x# x# x# x# x#
1. Initial purchase(s) will be accounted for by means of the fair value method (o
x# x# x# x# x# x# x# x# x# x# x# x# x#
r at cost) until the ability to significantly influence is attained.
x# x# x# x# x# x# x# x# x# x#
2. When the ability to exercise significant influence occurs following a series of st
x# x# x# x# x# x# x# x# x# x# x# x#
ock purchases, the investor applies the equity method prospectively. The total
x# x# x# x# x# x# x# x# x# x# x#
fair value at the date significant influence is attained is compared to the invest
x# x# x# x# x# x# x# x# x# x# x# x# x#
ee‘s book value to determine future excess fair value amortizations.
x# x# x# x# x# x# x# x# x#
B. Investee income from other than continuing operations
x# x# x# x# x# x#
1. The investor recognizes its share of investee reported other comprehensi
x# x# x# x# x# x# x# x# x#
ve income (OCI) through the investment account and the investor‘s own
x# x# x# x# x# x# x# x# x# x# x#
OCI.
2. Income items such as discontinued operations that are reported separately by t
x# x# x# x# x# x# x# x# x# x# x#
he investee should be shown in the same manner by the investor. The materia
x# x# x# x# x# x# x# x# x# x# x# x# x#
lity of these other investee income elements (as it affects the investor) continue
x# x# x# x# x# x# x# x# x# x# x# x#
s to be a criterion for separate disclosure.
x# x# x# x# x# x# x#
C. Investee losses x#
1. Losses reported by the investee create corresponding losses for the investor.
x# x# x# x# x# x# x# x# x# x#
2. A permanent decline in the fair value of an investee‘s stock should be recogni
x# x# x# x# x# x# x# x# x# x# x# x# x#
zed immediately by the investor as an impairment loss.
x# x# x# x# x# x# x# x#
3. Investee losses can possibly reduce the carrying value of the investment accou
x# x# x# x# x# x# x# x# x# x# x#
nt to a zero balance. At that point, the equity method ceases to be applicable a
x# x# x# x# x# x# x# x# x# x# x# x# x# x# x#
nd the fair-value method is subsequently used.
x# x# x# x# x# x#
D. Reporting the sale of an equity investment x# x# x# x# x# x#
1. The investor applies the equity method until the disposal date to establish a pro
x# x# x# x# x# x# x# x# x# x# x# x# x#
per book value. x# x#
2. Following the sale, the equity method continues to be appropriate if enough sha
x# x# x# x# x# x# x# x# x# x# x# x#
res are still held to maintain the investor‘s ability to significantly influence the in
x# x# x# x# x# x# x# x# x# x# x# x# x#
vestee. If that ability has been lost, the fair-value method is subsequently used.
x# x# x# x# x# x# x# x# x# x# x# x#
2-24
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Hillx#LLC.
, Solution Manual For All Chapters
x# x# x# x#
IV. Excess investment cost over book value acquired
x# x# x# x# x# x#
A. The price an investor pays for equity securities often differs significantly from t
x# x# x# x# x# x# x# x# x# x# x# x#
he investee‘s underlying book value primarily because the historical cost bas
x# x# x# x# x# x# x# x# x# x#
ed accounting model does not keep track of changes in a firm‘s fair value.
x# x# x# x# x# x# x# x# x# x# x# x# x#
B. Payments made in excess of underlying book value can sometimes be identified
x# x# x# x# x# x# x# x# x# x# x# x#
with specific investee accounts such as inventory or equipment.
x# x# x# x# x# x# x# x#
C. An extra acquisition price can also be assigned to anticipated benefits that are ex
x# x# x# x# x# x# x# x# x# x# x# x# x#
pected to be derived from the investment. In accounting, these amounts are pres
x# x# x# x# x# x# x# x# x# x# x# x#
umed to reflect an intangible asset referred to as goodwill. Goodwill is calculated
x# x# x# x# x# x# x# x# x# x# x# x# x#
as any excess payment that is not attributable to specific identifiable assets and li
x# x# x# x# x# x# x# x# x# x# x# x# x#
abilities of the investee. Because goodwill is an indefinite-
x# x# x# x# x# x# x# x#
lived asset, it is not amortized.x# x# x# x# x#
V. Deferral of intra-entity gross profit in inventory
x# x# x# x# x# x#
A. The investor‘s share of intra-
x# x# x# x#
entity profits in ending inventory are not recognized until the transferred goods are
x# x# x# x# x# x# x# x# x# x# x# x# x#
either consumed or until they are resold to unrelated parties.
x# x# x# x# x# x# x# x# x#
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 method a
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nd then recognized as income at the time of the inventory‘s eventual disposa
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l.
3. The amount of gross profit to be deferred is the investor‘s ownership percent
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age multiplied by the markup on the merchandise remaining at the end of the
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year. x#
C. Upstream sales of inventory x# x# x#
1. ―Upstream‖ refers to transfers made by the investee to the investor. x# x# x# x# x# x# x# x# x# x#
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 pro
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cedures are separately identified in Chapter One because the handling does v
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ary within the consolidation process. x# x# x# x#
Answers to Discussion Questions x# x# x#
The textbook includes discussion questions to stimulate student thought and discussion. Thes
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e questions are also designed to allow students to consider relevant issues that might otherwi
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se be overlooked. Some of these questions may be addressed by the instructor in class to m
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otivate student discussion. Students should be encouraged to begin by defining the issue(s) i
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n each case. Next, authoritative accounting literature (FASB ASC) or other relevant literature
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can be consulted as a preliminary step in arriving at logical actions. Frequently, the FASB Ac
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counting Standards Codification will provide the necessary support.
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Unfortunately, in accounting, definitive resolutions to financial reporting questions are not alwa
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ys available. Students often seem to believe that all accounting issues have been resolved in
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the past so that accounting education is only a matter of learning to apply historically prescrib
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ed procedures. However, in actual practice, the only real answer is often the one that provide
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s the fairest representation of the firm‘s transactions. If an authoritative solution is not availabl
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e, students should be directed to list all of the issues involved and the consequences of possi
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ble alternative actions. The various factors presented can be weighed to produce a viable sol
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ution.
The discussion questions are designed to help students develop research and critical thinking
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2-3
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