Advanced Accounting, 5th Edition
by Hopkins and Halsey, Chapter 1 to 19
TEST BANK
,Table of contents
1 Introduction To Business Combinations And The Conceptual Framework
2 Accounting For Business Combinations
3 Consolidated Financial Statements—Date Of Acquisition
4 Consolidated Financial Statements After Acquisition
5 Allocation And Depreciation Of Differences Between Implied And Book Values
6 Elimination Of Unrealized Profit On Intercompany Sales Of Inventory
7 Elimination Of Unrealized Gains Or Losses On Intercompany Sales Of Property And Equipment
8 Changes In Ownership Interest
9 Intercompany Bond Holdings And Miscellaneous Topics—Consolidated Financial Statements
10 Insolvency—Liquidation And Reorganization
11 International Financial Reporting Standards
12 Accounting For Foreign Currency Transactions And Hedging Foreign Exchange Risk
13 Translation Of Financial Statements Of Foreign Affiliates
14 Reporting For Segments And For Interim Financial Periods
15 Partnerships: Formation, Operation, And Ownership Changes
16 Partnership Liquidation
17 Introduction To Fund Accounting
18 Introduction To Accounting For State And Local Governmental Units
19 Accounting For Nongovernment Nonbusiness Organizations: Colleges And Universities, Hospitals And Other
Health Care Organizations
,Chapter 1- INTRODUCTION TO BUSINESS COMBINATIONS AND THE CONCEPTUAL
FRAMEWORK
1. a. If the investor acquired 100% of the investee at book value, the Equity Investment
account is equal to the Stockholders‘ Equity of the investee company. It, therefore,
includes the assets and liabilities of the investee company in one account. The
investor‘s balance sheet, therefore, includes the Stockholders‘ Equity of the investee
company, and, implicitly, its assets and liabilities. In the consolidation process, the
balance sheets of the investor and investee company are brought together.
Consolidated Stockholders‘ Equity will be the same as that which the investor currently
reports; only total assets and total liabilities will change.
b. If the investor owns 100% of the investee, the equity income that the investor reports is
equal to the net income of the investee, thus implicitly including its revenues and
expenses. Replacing the equity income with the revenues and expenses of the investee
company in the consolidation process will yield the same net income.
2. FASB ASC 323-10 provides the following guidance with respect to the accounting for
receipt of dividends using the equity method:
The equity method tends to be most appropriate if an investment enables the
investor to influence the operating or financial decisions of the investee. The
investor then has a degree of responsibility for the return on its investment, and it
is appropriate to include in the results of operations of the investor its share of the
earnings or losses of the investee. (¶323-10-05-5)
The equity method is an appropriate means of recogniẓing increases or decreases
measured by generally accepted accounting principles (GAAP) in the economic resources
underlying the investments. Furthermore, the equity method of accounting more closely
meets the objectives of accrual accounting than does the cost method because the investor
recogniẓes its share of the earnings and losses of the investee in the periods in which they
are reflected in the accounts of the investee. (¶323-10-05-4)
Under the equity method, an investor shall recogniẓe its share of the earnings or losses of
an investee in the periods for which they are reported by the investee in its financial
statements rather than in the period in which an investee declares a dividend (¶323-10- 35-
4).
, 3. The recognition of equity income does not mean that cash has been received. In fact,
dividends paid by the investee to the investor are typically a small percentage of its
reported net income. The projection of future net income that includes equity income as a
significant component might not, therefore, imply significant generation of cash.
4. The accounting for Altria‘s investment in ABI depends on the degree of influence or
control it can exert over that company. A classification of ―no influence‖ does not appear
appropriate since Altria owns 10.1% of the outstanding common stock and also ―active
representation on ABI‘s Board of Directors (―ABI Board‖) and certain ABI Board
committees. Through this representation, Altria participates in ABI policy making
processes.‖ A classification of ―significant influence‖ seems most appropriate given the
facts, and this classification warrants accounting for the investment using the equity method
of accounting.
5. a. An investor may write down the carrying amount of its Equity Investment if the fair
value of that investment has declined below its carrying value and that decline is
deemed to be other than temporary.
b. There is considerable judgment in determining whether a decline in fair value is other
than temporary. The write-down amounts to a prediction that the future fair value of the
investment will not rise above the current carrying amount. If a company deems the
decline to be temporary, it does not write down the investment, and a loss is not
recogniẓed in its income statement. If the decline is deemed to be other than
temporary, the investment is written down and a loss is reported. Companies can use
this flexibility to decide whether to recogniẓe a loss in the current year or to postpone it
to a future year.
6. Under the equity method, an investor recogniẓes its share of the earnings or losses of an
investee in the periods for which they are reported by the investee in its financial
statements. FASB ASC 323-10-35-7 states that ―Intra-entity profits and losses shall be
eliminated until realiẓed by the investor or investee as if the investee were consolidated.‖
These intercompany items are eliminated to avoid double counting and prematurely
recogniẓing income.
by Hopkins and Halsey, Chapter 1 to 19
TEST BANK
,Table of contents
1 Introduction To Business Combinations And The Conceptual Framework
2 Accounting For Business Combinations
3 Consolidated Financial Statements—Date Of Acquisition
4 Consolidated Financial Statements After Acquisition
5 Allocation And Depreciation Of Differences Between Implied And Book Values
6 Elimination Of Unrealized Profit On Intercompany Sales Of Inventory
7 Elimination Of Unrealized Gains Or Losses On Intercompany Sales Of Property And Equipment
8 Changes In Ownership Interest
9 Intercompany Bond Holdings And Miscellaneous Topics—Consolidated Financial Statements
10 Insolvency—Liquidation And Reorganization
11 International Financial Reporting Standards
12 Accounting For Foreign Currency Transactions And Hedging Foreign Exchange Risk
13 Translation Of Financial Statements Of Foreign Affiliates
14 Reporting For Segments And For Interim Financial Periods
15 Partnerships: Formation, Operation, And Ownership Changes
16 Partnership Liquidation
17 Introduction To Fund Accounting
18 Introduction To Accounting For State And Local Governmental Units
19 Accounting For Nongovernment Nonbusiness Organizations: Colleges And Universities, Hospitals And Other
Health Care Organizations
,Chapter 1- INTRODUCTION TO BUSINESS COMBINATIONS AND THE CONCEPTUAL
FRAMEWORK
1. a. If the investor acquired 100% of the investee at book value, the Equity Investment
account is equal to the Stockholders‘ Equity of the investee company. It, therefore,
includes the assets and liabilities of the investee company in one account. The
investor‘s balance sheet, therefore, includes the Stockholders‘ Equity of the investee
company, and, implicitly, its assets and liabilities. In the consolidation process, the
balance sheets of the investor and investee company are brought together.
Consolidated Stockholders‘ Equity will be the same as that which the investor currently
reports; only total assets and total liabilities will change.
b. If the investor owns 100% of the investee, the equity income that the investor reports is
equal to the net income of the investee, thus implicitly including its revenues and
expenses. Replacing the equity income with the revenues and expenses of the investee
company in the consolidation process will yield the same net income.
2. FASB ASC 323-10 provides the following guidance with respect to the accounting for
receipt of dividends using the equity method:
The equity method tends to be most appropriate if an investment enables the
investor to influence the operating or financial decisions of the investee. The
investor then has a degree of responsibility for the return on its investment, and it
is appropriate to include in the results of operations of the investor its share of the
earnings or losses of the investee. (¶323-10-05-5)
The equity method is an appropriate means of recogniẓing increases or decreases
measured by generally accepted accounting principles (GAAP) in the economic resources
underlying the investments. Furthermore, the equity method of accounting more closely
meets the objectives of accrual accounting than does the cost method because the investor
recogniẓes its share of the earnings and losses of the investee in the periods in which they
are reflected in the accounts of the investee. (¶323-10-05-4)
Under the equity method, an investor shall recogniẓe its share of the earnings or losses of
an investee in the periods for which they are reported by the investee in its financial
statements rather than in the period in which an investee declares a dividend (¶323-10- 35-
4).
, 3. The recognition of equity income does not mean that cash has been received. In fact,
dividends paid by the investee to the investor are typically a small percentage of its
reported net income. The projection of future net income that includes equity income as a
significant component might not, therefore, imply significant generation of cash.
4. The accounting for Altria‘s investment in ABI depends on the degree of influence or
control it can exert over that company. A classification of ―no influence‖ does not appear
appropriate since Altria owns 10.1% of the outstanding common stock and also ―active
representation on ABI‘s Board of Directors (―ABI Board‖) and certain ABI Board
committees. Through this representation, Altria participates in ABI policy making
processes.‖ A classification of ―significant influence‖ seems most appropriate given the
facts, and this classification warrants accounting for the investment using the equity method
of accounting.
5. a. An investor may write down the carrying amount of its Equity Investment if the fair
value of that investment has declined below its carrying value and that decline is
deemed to be other than temporary.
b. There is considerable judgment in determining whether a decline in fair value is other
than temporary. The write-down amounts to a prediction that the future fair value of the
investment will not rise above the current carrying amount. If a company deems the
decline to be temporary, it does not write down the investment, and a loss is not
recogniẓed in its income statement. If the decline is deemed to be other than
temporary, the investment is written down and a loss is reported. Companies can use
this flexibility to decide whether to recogniẓe a loss in the current year or to postpone it
to a future year.
6. Under the equity method, an investor recogniẓes its share of the earnings or losses of an
investee in the periods for which they are reported by the investee in its financial
statements. FASB ASC 323-10-35-7 states that ―Intra-entity profits and losses shall be
eliminated until realiẓed by the investor or investee as if the investee were consolidated.‖
These intercompany items are eliminated to avoid double counting and prematurely
recogniẓing income.
