Advanced Accounting 14th Edition by Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik | A+ Solution Manual

Solution ManualFor All Chapters
f7 f7 f7 f7




SOLUTION MANUAL FOR f 7 f 7




ADVANCED ACCOUNTING 15TH EDITIONBYJOEBENHOYLE,THOMAS SCHAEFER f7 f7 f7 f7 f7 f7 f7 f7 f7




AND TIMOTHY DOUPNIK
f7 f7 f7




CHAPTER1-19 f7




CHAPTER1 f7




THEEQUITYMETHODOFACCOUNTINGFORINVESTMENTS
f7 f7 f7 f7 f7 f7 f7




Chapter Outline f7




I. Four methodsare principally used to account for an investment in equity securities along with a
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




fair value option.
f7 f7 f7




A. Fair value method: applied by an investor when only a small percentage of a
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




company‘s voting stock is held.
f7 f7 f7 f7 f7




1. Theinvestor recognizes income whenthe investee declaresa dividend. f7 f7 f7 f7 f7 f7 f7 f7 f7




2. Portfolios are reported at fair value. If fair values are unavailable, investment is f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




reported at cost. f7 f7 f7




B. Cost Method: applied to investments without a readily determinable fair value. When the
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




fair value of an investment in equity securities is not readily determinable, andthe
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




investment provides neither significant influence nor control, the investment may be
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




measured at cost. The investment remains at cost unless
f7 f7 f7 f7 f7 f7 f7 f7 f7




1. A demonstrable impairment occursfor the investment, or
f7 f7 f7 f7 f7 f7 f7




2. An observable price changeoccurs for identical or similar investments of the same
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




issuer. f7




Theinvestor typically recognizes its share of investee dividends declared as dividend
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




income.
f7




C. Consolidation: when one firm controls another (e.g., when a parent has a majority f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




interest in the voting stock of a subsidiary or control through variable interests, their
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




financial statements are consolidated and reported for the combined entity.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




D. Equity method: applied when the investor has the ability to exercise significant f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




influence over operating and financial policies of the investee.
f7 f7 f7 f7 f7 f7 f7 f7 f7




1. Ability to significantlyinfluence investee is indicated byseveralfactors including f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




representation on the board of directors, participation in policy-making, etc.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




2. GAAPguidelines presume the equity method is applicable if 20 to 50percent of the f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the priorwritten consent of McGrawHill LLC.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7

, outstanding voting stock of the investee is held by the investor. f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




Current financial reporting standards allow firms to elect to use fair value for any new
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




investment in equity shares including those where the equity method would otherwise apply.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




However, the option, once taken, is irrevocable. The investor recognizes both investee
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




dividends and changes in fair value over time as income.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




II. Accounting for an investment: the equity method f7 f7 f7 f7 f7 f7




A. Theinvestor adjusts the investment account to reflect all changes in the equity of the
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




investee company.
f7 f7




B. Theinvestor accrues investee income when it is reported in theinvestee‘s financial
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




statements.
f7




C. Dividends declared by the investee create a reduction in the carrying amount of the f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




Investment account. This book assumes all investee dividends are declared and paid in
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




the same reporting period.
f7 f7 f7 f7




III. Special accounting procedures usedinthe application of theequitymethod
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




A. Reporting achange to the equity method when the ability to significantly influence an f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




investee is achieved through a series of acquisitions.
f7 f7 f7 f7 f7 f7 f7 f7




1. Initial purchase(s) will be accounted for by means of the fair value method(or at cost)
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




until the ability to significantly influence is attained.
f7 f7 f7 f7 f7 f7 f7 f7




2. Whenthe ability to exercise significant influence occursfollowing a series of stock
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




purchases, the investor applies the equity method prospectively. The total fair value at
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




the date significant influence is attained is compared to the investee‘s book value to
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




determine future excess fair value amortizations.
f7 f7 f7 f7 f7 f7




B. Investeeincomefrom other thancontinuing operations f7 f7 f7 f7 f7 f7




1. Theinvestor recognizes its shareof investee reported other comprehensive
f7 f7 f7 f7 f7 f7 f7 f7 f7




income (OCI) through the investment account and the investor‘s own OCI.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




2. Income items such as discontinued operations that are reported separately by the f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




investee should be shown in the same manner by the investor. The materiality of these
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




other investee income elements (as it affects the investor) continues to be a criterion for
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




separate disclosure.
f7 f7




C. Investeelosses f7




1. Losses reported by theinvestee create corresponding lossesfor the investor. f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




2. A permanent decline in the fair value of an investee‘s stock should be recognized
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




immediately by the investor as an impairment loss.
f7 f7 f7 f7 f7 f7 f7 f7




3. Investee losses can possibly reduce the carrying value of the investment account to a f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




zero balance. At that point, the equity method ceases to be applicable and the fair-value
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




method is subsequently used.
f7 f7 f7 f7




D. Reporting the sale of an equityinvestment f7 f7 f7 f7 f7 f7




1. The investor applies the equity method until the disposal date to establish a proper book
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




value. f7




2. Following the sale, the equity methodcontinues to be appropriate if enough shares are f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




still held to maintain the investor‘s ability to significantly influence the investee. If that
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




ability has been lost, the fair-value method is subsequently used.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




2-24
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the priorwritten consent of McGrawHill LLC.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7

,Solution ManualFor All Chapters
f7 f7 f7 f7




IV. Excess investment costover bookvalue acquired f7 f7 f7 f7 f7 f7




A. Theprice an investor pays for equity securities often differssignificantly from the f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




investee‘s underlying book value primarily because the historical cost based
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




accounting model does not keep track of changes in a firm‘s fair value.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




B. Paymentsmade in excess of underlying book value can sometimes be identified with f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




specific investee accounts such as inventory or equipment.
f7 f7 f7 f7 f7 f7 f7 f7




C. An extra acquisition price can also be assigned to anticipated benefits that are expected
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




to be derived from the investment. In accounting, these amounts are presumedto reflect
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




an intangible asset referred to as goodwill. Goodwill is calculated as any excess payment
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




that is not attributable to specific identifiable assets and liabilities of the investee.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




Because goodwill is an indefinite-lived asset, it is not amortized.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




V. Deferral of intra-entity gross profit in inventory f7 f7 f7 f7 f7 f7




A. The investor‘s share of intra-entity profits in ending inventory are not recognized until the f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




transferred goods are either consumed or until they are resold tounrelated parties.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




B. Downstreamsales of inventory f7 f7 f7




1. ―Downstream‖refers totransfersmadebytheinvestor totheinvestee. f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




2. Intra-entity gross profits from sales are initially deferred under the equity method and f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




then recognized as income at the time of the inventory‘s eventual disposal. f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




3. Theamount of gross profit to be deferred is the investor‘s ownership percentage f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




multiplied by the markup on the merchandise remaining at the end of the year. f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




C. Upstream sales of inventory f7 f7 f7




1. ―Upstream‖referstotransfersmadebytheinvestee totheinvestor. f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




2. Under the equity method, the deferral process for intra-entity gross profits is identical f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




for upstream and downstream transfers. The procedures are separately identified in f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




Chapter One because the handling does vary within the consolidation process. f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




Answers to Discussion Questions f7 f7 f7




The textbook includes discussion questions to stimulate student thought and discussion. These
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




questions are also designed to allow students to consider relevant issues that might otherwise be
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




overlooked. Some of these questions may be addressed by the instructor in class to motivate student
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




discussion. Students should be encouraged to begin by defining the issue(s) in each case. Next,
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




authoritative accounting literature (FASB ASC) or other relevant literature can be consulted as a
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




preliminary step in arriving at logical actions. Frequently, the FASB Accounting Standards
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




Codification will provide the necessary support.
f7 f7 f7 f7 f7 f7




Unfortunately, inaccounting, definitive resolutions tofinancial reporting questions are not always f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




available. Students often seem to believe that all accounting issues have been resolved in the past so
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




that accounting education is only a matter of learning to apply historically prescribed procedures.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




However, in actual practice, the only real answer is often the one that provides the fairest
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




representation of the firm‘s transactions. If an authoritative solution is not available, students should be
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




directed to list all of the issues involved and the consequences of possible alternative actions. The
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




various factors presented can be weighed to produce a viable solution.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




Thediscussion questions are designed to help students develop research and critical thinking skills in
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




addressing issues that go beyond the purely mechanical elements of accounting.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the priorwritten consent of McGrawHill LLC.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7

, Did the Cost Method Invite Manipulation?
f7 f7 f7 f7 f7




The cost method of accounting for investments often caused a lack of objectivity in reported income
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




figures.With a large block of the investee‘s voting shares, an investor could influence the amount and
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




timing of the investee‘s dividend declarations. Thus, when enjoying a good earnings year, an investor
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




might influence the investee to withhold declaring a dividend until needed in a subsequent year.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




Alternatively, if the investor judged that its current year earnings ―needed a boost,‖ it might influence
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




the investee to declare a current year dividend. The equity method effectively removes managers‘
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




ability to increase current income (or defer income to future periods) through their influence over the
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




timing and amounts of investee dividend declarations.
f7 f7 f7 f7 f7 f7 f7




At first glance it may seem that the fair value method allows managers to manipulate income because
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




investee dividends are recorded as income by the investor. However, dividends paid typically are
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




accompanied bya decrease in fair value (also recognized in income), thus leaving reported net income
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




unaffected.
f7




Does the Equity Method Really Apply Here?
f7 f7 f7 f7 f7 f7




The discussion in the case between the two accountants is limited to the reason for the investment
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




acquisition and the current percentage of ownership. Instead, they should be examining the actual
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




interaction that currently exists between the two companies. Although the ability to exercise significant
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




influence over operating and financial policies appears to be a rather vague criterion, ASC 323
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




"Investments—Equity Method and Joint Ventures," clearly specifies actual events that indicate this
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




level of authority (paragraph 323-10-15-6):
f7 f7 f7 f7 f7




Ability to exercise that influence may be indicated in several ways, such as representation on the board
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




of directors, participation in policy-making processes, material intra-entity transactions, interchange
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




of managerial personnel, or technological dependency. Another important consideration is the extent
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




of ownership by an investor in relation to the concentration of other shareholdings, but substantial or
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




majority ownership of the voting stock of an investee company by another investor does not
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




necessarily preclude the ability to exercise significant influence by the investor.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




In this case, the accountants would be wise to determine whether Dennis Bostitch or any other member
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




of the Highland Laboratories administration is participating in the management of Abraham, Inc. If any
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




individual from Highland's organization is on Abraham‘s board of directors or is participating in
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




management decisions, the equity method would seem to be appropriate.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




Likewise, if significant transactions have occurredbetween the companies (such as loans by Highland f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




toAbraham), theabilityto applysignificant influencebecomes much moreevident.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




However, if James Abraham continues to operate Abraham, Inc., with little or no regard for Highland, f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




the equity method should not be applied. This possibility seems especially likely in this case since one
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




stockholder, James Abraham, continues to hold a majority (2/3) of the voting stock. Thus, evidence of
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f 7 f7 f7 f7




the ability to apply significant influence must be present before the equity method is viewed as
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




applicable. The mere holding of 1/3 of the stock is not conclusive.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7




2-44
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the priorwritten consent of McGrawHill LLC.
f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7 f7