SOLUTIONS MANUAL for Advanced Accounting, 15th Edition by Joe Ben Hoyle, Schaefer and Doupnik | Complete 19 Chapters

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,SOLUTION MANUAL FOR #x #x




ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAE
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FER AND TIMOTHY DOUPNIK
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CHAPTER 1-19 #x




CHAPTER 1 TH #x #x




E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
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Chapter Outline
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I. Four methods are principally used to account for an investment in equity securities al
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ong with a fair value option.
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A. Fair value method: applied by an investor when only a small percentage
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of a company‘s voting stock is held.
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1. The investor recognizes income when the investee declares a dividend.
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2. Portfolios are reported at fair value. If fair values are unavailable, investmen
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t is reported at cost.
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B. Cost Method: applied to investments without a readily determinable fair value. Wh
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en the fair value of an investment in equity securities is not readily determinable, a
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nd the investment provides neither significant influence nor control, the investment
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may be measured at cost. The investment remains at cost unless
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1. A demonstrable impairment occurs for the investment, or
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2. An observable price change occurs for identical or similar investments of the sa
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me issuer. #x




The investor typically recognizes its share of investee dividends declared as dividen
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d income.
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C. Consolidation: when one firm controls another (e.g., when a parent has a majori
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ty interest in the voting stock of a subsidiary or control through variable interests
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, their financial statements are consolidated and reported for the combined entit
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y.

D. Equity method: applied when the investor has the ability to exercise signific
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ant influence over operating and financial policies of the investee.
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1. Ability to significantly influence investee is indicated by several factors includi
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ng representation on the board of directors, participation in policy-
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making, etc. #x




2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
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, outstanding voting stock of the investee is held by the investor.
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Current financial reporting standards allow firms to elect to use fair value for any new i
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nvestment in equity shares including those where the equity method would otherwise a
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pply. However, the option, once taken, is irrevocable. The investor recognizes both inv
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estee dividends and changes in fair value over time as income.
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II. Accounting for an investment: the equity method
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A. The investor adjusts the investment account to reflect all changes in the equity of
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the investee company.
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B. The investor accrues investee income when it is reported in the investee‘s finan
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cial statements.
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C. Dividends declared by the investee create a reduction in the carrying amount of th
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e Investment account. This book assumes all investee dividends are declared and
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paid in the same reporting period.
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III. Special accounting procedures used in the application of the equity method
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A. Reporting a change to the equity method when the ability to significantly influence
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an investee is achieved through a series of acquisitions.
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1. Initial purchase(s) will be accounted for by means of the fair value method (o
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r at cost) until the ability to significantly influence is attained.
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2. When the ability to exercise significant influence occurs following a series of st
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ock purchases, the investor applies the equity method prospectively. The total
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fair value at the date significant influence is attained is compared to the invest
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ee‘s book value to determine future excess fair value amortizations.
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B. Investee income from other than continuing operations
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1. The investor recognizes its share of investee reported other comprehensi
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ve income (OCI) through the investment account and the investor‘s own
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OCI.
2. Income items such as discontinued operations that are reported separately by t
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he investee should be shown in the same manner by the investor. The materia
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lity of these other investee income elements (as it affects the investor) continue
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s to be a criterion for separate disclosure.
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C. Investee losses #x


1. Losses reported by the investee create corresponding losses for the investor.
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2. A permanent decline in the fair value of an investee‘s stock should be recogni
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zed immediately by the investor as an impairment loss.
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3. Investee losses can possibly reduce the carrying value of the investment accou
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nt to a zero balance. At that point, the equity method ceases to be applicable a
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nd the fair-value method is subsequently used.
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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
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per book value. #x #x


2. Following the sale, the equity method continues to be appropriate if enough sha
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res are still held to maintain the investor‘s ability to significantly influence the in
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vestee. If that ability has been lost, the fair-value method is subsequently used.
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IV. Excess investment cost over book value acquired
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A. The price an investor pays for equity securities often differs significantly from t
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he investee‘s underlying book value primarily because the historical cost bas
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ed accounting model does not keep track of changes in a firm‘s fair value.
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B. Payments made in excess of underlying book value can sometimes be identified
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with specific investee accounts such as inventory or equipment.
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C. An extra acquisition price can also be assigned to anticipated benefits that are ex
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pected to be derived from the investment. In accounting, these amounts are pres
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umed to reflect an intangible asset referred to as goodwill. Goodwill is calculated
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as any excess payment that is not attributable to specific identifiable assets and li
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abilities of the investee. Because goodwill is an indefinite-
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lived asset, it is not amortized. #x #x #x #x #x




V. Deferral of intra-entity gross profit in inventory
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A. The investor‘s share of intra-
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entity profits in ending inventory are not recognized until the transferred goods are
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either consumed or until they are resold to unrelated parties.
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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-#x #x #x #x #x #x #x #x


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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Hill LLC.