2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,Solution Manual For All Chapters
b b b b
SOLUTION MANUAL FOR b b
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS
b b b b b b b b
SCHAEFER AND TIMOTHY DOUPNIK
b b b b
CHAPTER 1-19 b
CHAPTER 1 b
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
b b b b b b b
Chapter Outline b
I. Four methods are principally used to account for an investment in equity securities
b b b b b b b b b b b b
along with a fair value option.
b b b b b b
A. Fair value method: applied by an investor when only a small percentage of
b b b b b b b b b b b b
a company‘s voting stock is held.
b b b b b b
1. The investor recognizes income when the investee declares a dividend.
b b b b b b b b b
2. Portfolios are reported at fair value. If fair values are unavailable, investment
b b b b b b b b b b b
is reported at cost.
b b b b
B. Cost Method: applied to investments without a readily determinable fair value. When
b b b b b b b b b b b
the fair value of an investment in equity securities is not readily determinable, and
b b b b b b b b b b b b b b
the investment provides neither significant influence nor control, the investment may
b b b b b b b b b b b
be measured at cost. The investment remains at cost unless
b b b b b b b b b b
1. A demonstrable impairment occurs for the investment, or
b b b b b b b
2. An observable price change occurs for identical or similar investments of the
b b b b b b b b b b b
same issuer. b b
The investor typically recognizes its share of investee dividends declared as dividend
b b b b b b b b b b b
income.
b
C. Consolidation: when one firm controls another (e.g., when a parent has a majority b b b b b b b b b b b b
interest in the voting stock of a subsidiary or control through variable interests,
b b b b b b b b b b b b b
their financial statements are consolidated and reported for the combined entity.
b b b b b b b b b b b
D. Equity method: applied when the investor has the ability to exercise
b b b b b b b b b b
significant influence over operating and financial policies of the investee.
b b b b b b b b b b
1. Ability to significantly influence investee is indicated by several factors including
b b b b b b b b b b
representation on the board of directors, participation in policy-making, etc.
b b b b b b b b b b
2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
b b b b b b b b b b b b b b
2-1
© 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. b b b b b b b b b b
Current financial reporting standards allow firms to elect to use fair value for any new
b b b b b b b b b b b b b b
investment in equity shares including those where the equity method would otherwise
b b b b b b b b b b b b
apply. However, the option, once taken, is irrevocable. The investor recognizes both
b b b b b b b b b b b b
investee dividends and changes in fair value over time as income.
b b b b b b b b b b b
II. Accounting for an investment: the equity method
b b b b b b
A. The investor adjusts the investment account to reflect all changes in the equity of
b b b b b b b b b b b b b
the investee company.
b b b
B. The investor accrues investee income when it is reported in the investee‘s
b b b b b b b b b b b
financial statements.
b b
C. Dividends declared by the investee create a reduction in the carrying amount of the
b b b b b b b b b b b b b
Investment account. This book assumes all investee dividends are declared and
b b b b b b b b b b b
paid in the same reporting period.
b b b b b b
III. Special accounting procedures used in the application of the equity method
b b b b b b b b b b
A. Reporting a change to the equity method when the ability to significantly influence
b b b b b b b b b b b b
an investee is achieved through a series of acquisitions.
b b b b b b b b b
1. Initial purchase(s) will be accounted for by means of the fair value method (or
b b b b b b b b b b b b b
at cost) until the ability to significantly influence is attained.
b b b b b b b b b b
2. When the ability to exercise significant influence occurs following a series of
b b b b b b b b b b b
stock purchases, the investor applies the equity method prospectively. The total
b b b b b b b b b b b
fair value at the date significant influence is attained is compared to the
b b b b b b b b b b b b b
investee‘s book value to determine future excess fair value amortizations.
b b b b b b b b b b
B. Investee income from other than continuing operations
b b b b b b
1. The investor recognizes its share of investee reported other comprehensive
b b b b b b b b b
income (OCI) through the investment account and the investor‘s own OCI.
b b b b b b b b b b b
2. Income items such as discontinued operations that are reported separately by
b b b b b b b b b b
the investee should be shown in the same manner by the investor. The
b b b b b b b b b b b b b
materiality of these other investee income elements (as it affects the investor)
b b b b b b b b b b b b
continues to be a criterion for separate disclosure.
b b b b b b b b
C. Investee losses b
1. Losses reported by the investee create corresponding losses for the investor.
b b b b b b b b b b
2. A permanent decline in the fair value of an investee‘s stock should be
b b b b b b b b b b b b
recognized immediately by the investor as an impairment loss.
b b b b b b b b b
3. Investee losses can possibly reduce the carrying value of the investment account
b b b b b b b b b b b
to a zero balance. At that point, the equity method ceases to be applicable and
b b b b b b b b b b b b b b b
the fair-value method is subsequently used.
b b b b b b
D. Reporting the sale of an equity investment b b b b b b
1. The investor applies the equity method until the disposal date to establish a
b b b b b b b b b b b b
proper book value.
b b b
2. Following the sale, the equity method continues to be appropriate if enough
b b b b b b b b b b b
shares are still held to maintain the investor‘s ability to significantly influence the
b b b b b b b b b b b b b
investee. If that ability has been lost, the fair-value method is subsequently used.
b b b b b b b b b b b b b
2-24
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Solution Manual For All Chapters
b b b b
IV. Excess investment cost over book value acquired
b b b b b b
A. The price an investor pays for equity securities often differs significantly from
b b b b b b b b b b b
the investee‘s underlying book value primarily because the historical cost
b b b b b b b b b b
based accounting model does not keep track of changes in a firm‘s fair value.
b b b b b b b b b b b b b b
B. Payments made in excess of underlying book value can sometimes be identified
b b b b b b b b b b b
with specific investee accounts such as inventory or equipment.
b b b b b b b b b
C. An extra acquisition price can also be assigned to anticipated benefits that are
b b b b b b b b b b b b
expected to be derived from the investment. In accounting, these amounts are
b b b b b b b b b b b b
presumed to reflect an intangible asset referred to as goodwill. Goodwill is
b b b b b b b b b b b b
calculated as any excess payment that is not attributable to specific identifiable
b b b b b b b b b b b b
assets and liabilities of the investee. Because goodwill is an indefinite-lived asset, it
b b b b b b b b b b b b b
is not amortized.
b b b
V. Deferral of intra-entity gross profit in inventory
b b b b b b
A. The investor‘s share of intra-entity profits in ending inventory are not recognized until
b b b b b b b b b b b b
the transferred goods are either consumed or until they are resold to unrelated
b b b b b b b b b b b b b
parties. b
B. Downstream sales of inventory b b b
1. ―Downstream‖ refers to transfers made by the investor to the investee. b b b b b b b b b b
2. Intra-entity gross profits from sales are initially deferred under the equity b b b b b b b b b b
method and then recognized as income at the time of the inventory‘s eventual
b b b b b b b b b b b b b
disposal. b
3. The amount of gross profit to be deferred is the investor‘s ownership
b b b b b b b b b b b
percentage multiplied by the markup on the merchandise remaining at the end
b b b b b b b b b b b b
of the year. b b b
C. Upstream sales of inventory b b b
1. ―Upstream‖ refers to transfers made by the investee to the investor. b b b b b b b b b b
2. Under the equity method, the deferral process for intra-entity gross profits is
b b b b b b b b b b b
identical for upstream and downstream transfers. The procedures are separately
b b b b b b b b b b
identified in Chapter One because the handling does vary within the
b b b b b b b b b b b
consolidation process. b b
Answers to Discussion Questions
b b b
The textbook includes discussion questions to stimulate student thought and discussion. These
b b b b b b b b b b b
questions are also designed to allow students to consider relevant issues that might otherwise
b b b b b b b b b b b b b b
be overlooked. Some of these questions may be addressed by the instructor in class to
b b b b b b b b b b b b b b b
motivate student discussion. Students should be encouraged to begin by defining the issue(s) in
b b b b b b b b b b b b b b
each case. Next, authoritative accounting literature (FASB ASC) or other relevant literature can
b b b b b b b b b b b b b
be consulted as a preliminary step in arriving at logical actions. Frequently, the FASB
b b b b b b b b b b b b b b
Accounting Standards Codification will provide the necessary support.
b b b b b b b b
Unfortunately, in accounting, definitive resolutions to financial reporting questions are not always
b b b b b b b b b b b
available. Students often seem to believe that all accounting issues have been resolved in the
b b b b b b b b b b b b b b b
past so that accounting education is only a matter of learning to apply historically prescribed
b b b b b b b b b b b b b b b
procedures. However, in actual practice, the only real answer is often the one that provides the
b b b b b b b b b b b b b b b b
fairest representation of the firm‘s transactions. If an authoritative solution is not available,
b b b b b b b b b b b b b
students should be directed to list all of the issues involved and the consequences of possible
b b b b b b b b b b b b b b b b
alternative actions. The various factors presented can be weighed to produce a viable solution.
b b b b b b b b b b b b b b
The discussion questions are designed to help students develop research and critical thinking
b b b b b b b b b b b b
skills in addressing issues that go beyond the purely mechanical elements of accounting.
b b b b b b b b b b b b b
2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,Solution Manual For All Chapters
b b b b
SOLUTION MANUAL FOR b b
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS
b b b b b b b b
SCHAEFER AND TIMOTHY DOUPNIK
b b b b
CHAPTER 1-19 b
CHAPTER 1 b
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
b b b b b b b
Chapter Outline b
I. Four methods are principally used to account for an investment in equity securities
b b b b b b b b b b b b
along with a fair value option.
b b b b b b
A. Fair value method: applied by an investor when only a small percentage of
b b b b b b b b b b b b
a company‘s voting stock is held.
b b b b b b
1. The investor recognizes income when the investee declares a dividend.
b b b b b b b b b
2. Portfolios are reported at fair value. If fair values are unavailable, investment
b b b b b b b b b b b
is reported at cost.
b b b b
B. Cost Method: applied to investments without a readily determinable fair value. When
b b b b b b b b b b b
the fair value of an investment in equity securities is not readily determinable, and
b b b b b b b b b b b b b b
the investment provides neither significant influence nor control, the investment may
b b b b b b b b b b b
be measured at cost. The investment remains at cost unless
b b b b b b b b b b
1. A demonstrable impairment occurs for the investment, or
b b b b b b b
2. An observable price change occurs for identical or similar investments of the
b b b b b b b b b b b
same issuer. b b
The investor typically recognizes its share of investee dividends declared as dividend
b b b b b b b b b b b
income.
b
C. Consolidation: when one firm controls another (e.g., when a parent has a majority b b b b b b b b b b b b
interest in the voting stock of a subsidiary or control through variable interests,
b b b b b b b b b b b b b
their financial statements are consolidated and reported for the combined entity.
b b b b b b b b b b b
D. Equity method: applied when the investor has the ability to exercise
b b b b b b b b b b
significant influence over operating and financial policies of the investee.
b b b b b b b b b b
1. Ability to significantly influence investee is indicated by several factors including
b b b b b b b b b b
representation on the board of directors, participation in policy-making, etc.
b b b b b b b b b b
2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
b b b b b b b b b b b b b b
2-1
© 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. b b b b b b b b b b
Current financial reporting standards allow firms to elect to use fair value for any new
b b b b b b b b b b b b b b
investment in equity shares including those where the equity method would otherwise
b b b b b b b b b b b b
apply. However, the option, once taken, is irrevocable. The investor recognizes both
b b b b b b b b b b b b
investee dividends and changes in fair value over time as income.
b b b b b b b b b b b
II. Accounting for an investment: the equity method
b b b b b b
A. The investor adjusts the investment account to reflect all changes in the equity of
b b b b b b b b b b b b b
the investee company.
b b b
B. The investor accrues investee income when it is reported in the investee‘s
b b b b b b b b b b b
financial statements.
b b
C. Dividends declared by the investee create a reduction in the carrying amount of the
b b b b b b b b b b b b b
Investment account. This book assumes all investee dividends are declared and
b b b b b b b b b b b
paid in the same reporting period.
b b b b b b
III. Special accounting procedures used in the application of the equity method
b b b b b b b b b b
A. Reporting a change to the equity method when the ability to significantly influence
b b b b b b b b b b b b
an investee is achieved through a series of acquisitions.
b b b b b b b b b
1. Initial purchase(s) will be accounted for by means of the fair value method (or
b b b b b b b b b b b b b
at cost) until the ability to significantly influence is attained.
b b b b b b b b b b
2. When the ability to exercise significant influence occurs following a series of
b b b b b b b b b b b
stock purchases, the investor applies the equity method prospectively. The total
b b b b b b b b b b b
fair value at the date significant influence is attained is compared to the
b b b b b b b b b b b b b
investee‘s book value to determine future excess fair value amortizations.
b b b b b b b b b b
B. Investee income from other than continuing operations
b b b b b b
1. The investor recognizes its share of investee reported other comprehensive
b b b b b b b b b
income (OCI) through the investment account and the investor‘s own OCI.
b b b b b b b b b b b
2. Income items such as discontinued operations that are reported separately by
b b b b b b b b b b
the investee should be shown in the same manner by the investor. The
b b b b b b b b b b b b b
materiality of these other investee income elements (as it affects the investor)
b b b b b b b b b b b b
continues to be a criterion for separate disclosure.
b b b b b b b b
C. Investee losses b
1. Losses reported by the investee create corresponding losses for the investor.
b b b b b b b b b b
2. A permanent decline in the fair value of an investee‘s stock should be
b b b b b b b b b b b b
recognized immediately by the investor as an impairment loss.
b b b b b b b b b
3. Investee losses can possibly reduce the carrying value of the investment account
b b b b b b b b b b b
to a zero balance. At that point, the equity method ceases to be applicable and
b b b b b b b b b b b b b b b
the fair-value method is subsequently used.
b b b b b b
D. Reporting the sale of an equity investment b b b b b b
1. The investor applies the equity method until the disposal date to establish a
b b b b b b b b b b b b
proper book value.
b b b
2. Following the sale, the equity method continues to be appropriate if enough
b b b b b b b b b b b
shares are still held to maintain the investor‘s ability to significantly influence the
b b b b b b b b b b b b b
investee. If that ability has been lost, the fair-value method is subsequently used.
b b b b b b b b b b b b b
2-24
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Solution Manual For All Chapters
b b b b
IV. Excess investment cost over book value acquired
b b b b b b
A. The price an investor pays for equity securities often differs significantly from
b b b b b b b b b b b
the investee‘s underlying book value primarily because the historical cost
b b b b b b b b b b
based accounting model does not keep track of changes in a firm‘s fair value.
b b b b b b b b b b b b b b
B. Payments made in excess of underlying book value can sometimes be identified
b b b b b b b b b b b
with specific investee accounts such as inventory or equipment.
b b b b b b b b b
C. An extra acquisition price can also be assigned to anticipated benefits that are
b b b b b b b b b b b b
expected to be derived from the investment. In accounting, these amounts are
b b b b b b b b b b b b
presumed to reflect an intangible asset referred to as goodwill. Goodwill is
b b b b b b b b b b b b
calculated as any excess payment that is not attributable to specific identifiable
b b b b b b b b b b b b
assets and liabilities of the investee. Because goodwill is an indefinite-lived asset, it
b b b b b b b b b b b b b
is not amortized.
b b b
V. Deferral of intra-entity gross profit in inventory
b b b b b b
A. The investor‘s share of intra-entity profits in ending inventory are not recognized until
b b b b b b b b b b b b
the transferred goods are either consumed or until they are resold to unrelated
b b b b b b b b b b b b b
parties. b
B. Downstream sales of inventory b b b
1. ―Downstream‖ refers to transfers made by the investor to the investee. b b b b b b b b b b
2. Intra-entity gross profits from sales are initially deferred under the equity b b b b b b b b b b
method and then recognized as income at the time of the inventory‘s eventual
b b b b b b b b b b b b b
disposal. b
3. The amount of gross profit to be deferred is the investor‘s ownership
b b b b b b b b b b b
percentage multiplied by the markup on the merchandise remaining at the end
b b b b b b b b b b b b
of the year. b b b
C. Upstream sales of inventory b b b
1. ―Upstream‖ refers to transfers made by the investee to the investor. b b b b b b b b b b
2. Under the equity method, the deferral process for intra-entity gross profits is
b b b b b b b b b b b
identical for upstream and downstream transfers. The procedures are separately
b b b b b b b b b b
identified in Chapter One because the handling does vary within the
b b b b b b b b b b b
consolidation process. b b
Answers to Discussion Questions
b b b
The textbook includes discussion questions to stimulate student thought and discussion. These
b b b b b b b b b b b
questions are also designed to allow students to consider relevant issues that might otherwise
b b b b b b b b b b b b b b
be overlooked. Some of these questions may be addressed by the instructor in class to
b b b b b b b b b b b b b b b
motivate student discussion. Students should be encouraged to begin by defining the issue(s) in
b b b b b b b b b b b b b b
each case. Next, authoritative accounting literature (FASB ASC) or other relevant literature can
b b b b b b b b b b b b b
be consulted as a preliminary step in arriving at logical actions. Frequently, the FASB
b b b b b b b b b b b b b b
Accounting Standards Codification will provide the necessary support.
b b b b b b b b
Unfortunately, in accounting, definitive resolutions to financial reporting questions are not always
b b b b b b b b b b b
available. Students often seem to believe that all accounting issues have been resolved in the
b b b b b b b b b b b b b b b
past so that accounting education is only a matter of learning to apply historically prescribed
b b b b b b b b b b b b b b b
procedures. However, in actual practice, the only real answer is often the one that provides the
b b b b b b b b b b b b b b b b
fairest representation of the firm‘s transactions. If an authoritative solution is not available,
b b b b b b b b b b b b b
students should be directed to list all of the issues involved and the consequences of possible
b b b b b b b b b b b b b b b b
alternative actions. The various factors presented can be weighed to produce a viable solution.
b b b b b b b b b b b b b b
The discussion questions are designed to help students develop research and critical thinking
b b b b b b b b b b b b
skills in addressing issues that go beyond the purely mechanical elements of accounting.
b b b b b b b b b b b b b
2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
