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

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,Solution Manual For All Chapters
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SOLUTION MANUAL FOR bb bb




ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS
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SCHAEFER AND TIMOTHY DOUPNIK
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CHAPTER 1-19 bb




CHAPTER 1 bb




THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
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Chapter Outline bb




I. Four methods are principally used to account for an investment in equity securities
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along with a fair value option.
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A. Fair value method: applied by an investor when only a small
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percentage 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,
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investment is reported at cost.
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B. Cost Method: applied to investments without a readily determinable fair value.
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When the fair value of an investment in equity securities is not readily
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determinable, and the investment provides neither significant influence nor
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control, the investment may be measured at cost. The investment remains at
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cost unless bb bb




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
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same issuer.
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The investor typically recognizes its share of investee dividends declared as
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dividend income.
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C. Consolidation: when one firm controls another (e.g., when a parent has a bb bb bb bb bb bb bb bb bb bb bb


majority interest in the voting stock of a subsidiary or control through
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variable interests, their financial statements are consolidated and reported for
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the combined entity.
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D. Equity method: applied when the investor has the ability to exercise
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significant influence over operating and financial policies of the investee.
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1. Ability to significantly influence investee is indicated by several factors
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including representation on the board of directors, participation in policy-
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making, etc. bb




2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of
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© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

, the
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© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

, 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
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new investment in equity shares including those where the equity method would
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otherwise apply. However, the option, once taken, is irrevocable. The investor
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recognizes both investee 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
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of the investee company.
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B. The investor accrues investee income when it is reported in the investee‘s
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financial statements.
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C. Dividends declared by the investee create a reduction in the carrying amount
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of the Investment account. This book assumes all investee dividends are
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declared and 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
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influence 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
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(or 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
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stock purchases, the investor applies the equity method prospectively. The
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total fair value at the date significant influence is attained is compared to
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the investee‘s book value to determine future excess fair value
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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
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comprehensive income (OCI) through the investment account and the
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investor‘s own OCI.
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2. Income items such as discontinued operations that are reported separately
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by the investee should be shown in the same manner by the investor. The
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materiality of these other investee income elements (as it affects the
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investor) continues to be a criterion for separate disclosure.
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C. Investee losses bb


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
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recognized immediately by the investor as an impairment loss.
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3. Investee losses can possibly reduce the carrying value of the investment
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account to a zero balance. At that point, the equity method ceases to be
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applicable and the fair-value method is subsequently used.
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D. Reporting the sale of an equity investment
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1. The investor applies the equity method until the disposal date to establish a
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proper book value.
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2. Following the sale, the equity method continues to be appropriate if enough
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shares are still held to maintain the investor‘s ability to significantly influence
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the investee. If that ability has been lost, the fair-value method is
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subsequently used.
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