solutions_manual_for_advanced_accounting_15th_edition_hoyle_full_chapter

,ACCESS00Test00Bank00for00Advanced00Accounting0015th00Edition00Hoyl
e
Chapter000100-00The00Equity00Method00of00Accounting00for00Investments00–
00Hoyle,00Schaefer,00Doupnik,00Advanced00Accounting,0015e



CHAPTER00100
THE00EQUITY00METHOD00OF00ACCOUNTING00FOR00INVESTMENT
S

Chapter00Outline

I. Four00methods00are00principally00used00to00account00for00an00investment00in00equity00s
ecurities00along00with00a00fair00value00option.

A. Fair00value00method:00applied00by00an00investor00when00only00a00small00pe
rcentage00of00a00company’s00voting00stock00is00held.

1. The00investor00recognizes00income00when00the00investee00declares00a00dividend.

2. Portfolios00are00reported00at00fair00value.00If00fair00values00are00unavailable,00i
nvestment00is00reported00at00cost.

B. Cost00Method:00applied00to00investments00without00a00readily00determinable00fair00v
alue.00When00the00fair00value00of00an00investment00in00equity00securities00is00not00re
adily00determinable,00and00the00investment00provides00neither00significant00influence
00nor00control,00the00investment00may00be00measured00at00cost.00The00investment00
remains00at00cost00unless

1. A00demonstrable00impairment00occurs00for00the00investment,00or

2. An00observable00price00change00occurs00for00identical00or00similar00investments00
of00the00same00issuer.
The00investor00typically00recognizes00its00share00of00investee00dividends00declared00as00
dividend00income.

C. Consolidation:00when00one00firm00controls00another00(e.g.,00when00a00parent00has
00a00majority00interest00in00the00voting00stock00of00a00subsidiary00or00control00thro
ugh00variable00interests,00their00financial00statements00are00consolidated00and00re
ported00for00the00combined00entity.

D. Equity00method:00applied00when00the00investor00has00the00ability00to00exercis
e00significant00influence00over00operating00and00financial00policies00of00the00i
nvestee.

1. Ability00to00significantly00influence00investee00is00indicated00by00several00factor
s00including00representation00on00the00board00of00directors,00participation00in00
policy-making,00etc.

2. GAAP00guidelines00presume00the00equity00method00is00applicable00if002000to005000
percent00of00the00outstanding00voting00stock00of00the00investee00is00held00by00the
00investor.


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, Current00financial00reporting00standards00allow00firms00to00elect00to00use00fair00value00for
00any00new00investment00in00equity00shares00including00those00where00the00equity00meth
od00would00otherwise00apply.00However,00the00option,00once00taken,00is00irrevocable.00T
he00investor00recognizes00both00investee00dividends00and00changes00in00fair00value00ove
r00time00as00income.




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, ACCESS00Test00Bank00for00Advanced00Accounting0015th00Edition00Hoyl
e
Chapter000100-00The00Equity00Method00of00Accounting00for00Investments00–
00Hoyle,00Schaefer,00Doupnik,00Advanced00Accounting,0015e


II. Accounting00for00an00investment:00the00equity00method

A. The00investor00adjusts00the00investment00account00to00reflect00all00changes00in00the
00equity00of00the00investee00company.


B. The00investor00accrues00investee00income00when00it00is00reported00in00the00invest
ee’s00financial00statements.

C. Dividends00declared00by00the00investee00create00a00reduction00in00the00carrying00a
mount00of00the00Investment00account.00This00book00assumes00all00investee00dividen
ds00are00declared00and00paid00in00the00same00reporting00period.

III. Special00accounting00procedures00used00in00the00application00of00the00equity00method
A. Reporting00a00change00to00the00equity00method00when00the00ability00to00significantly
00influence00an00investee00is00achieved00through00a00series00of00acquisitions.
1. Initial00purchase(s)00will00be00accounted00for00by00means00of00the00fair00value0
0method00(or00at00cost)00until00the00ability00to00significantly00influence00is00attai
ned.
2. When00the00ability00to00exercise00significant00influence00occurs00following00a00ser
ies00of00stock00purchases,00the00investor00applies00the00equity00method00prospe
ctively.00The00total00fair00value00at00the00date00significant00influence00is00attaine
d00is00compared00to00the00investee’s00book00value00to00determine00future00exce
ss00fair00value00amortizations.
B. Investee00income00from00other00than00continuing00operations
1. The00investor00recognizes00its00share00of00investee00reported00other00com
prehensive00income00(OCI)00through00the00investment00account00and00the
00investor’s00own00OCI.
2. Income00items00such00as00discontinued00operations00that00are00reported00separa
tely00by00the00investee00should00be00shown00in00the00same00manner00by00the00i
nvestor.00The00materiality00of00these00other00investee00income00elements00(as00i
t00affects00the00investor)00continues00to00be00a00criterion00for00separate00disclosu
re.
C. Investee00losses
1. Losses00reported00by00the00investee00create00corresponding00losses00for00the00invest
or.
2. A00permanent00decline00in00the00fair00value00of00an00investee’s00stock00should00
be00recognized00immediately00by00the00investor00as00an00impairment00loss.
3. Investee00losses00can00possibly00reduce00the00carrying00value00of00the00investm
ent00account00to00a00zero00balance.00At00that00point,00the00equity00method00ceas
es00to00be00applicable00and00the00fair-value00method00is00subsequently00used.
D. Reporting00the00sale00of00an00equity00investment
1. The00investor00applies00the00equity00method00until00the00disposal00date00to00estab
lish00a00proper00book00value.
2. Following00the00sale,00the00equity00method00continues00to00be00appropriate00if00e
nough00shares00are00still00held00to00maintain00the00investor’s00ability00to00signific
antly00influence00the00investee.00If00that00ability00has00been00lost,00the00fair-
value00method00is00subsequently00used.

IV. Excess00investment00cost00over00book00value00acquired
A. The00price00an00investor00pays00for00equity00securities00often00differs00significa
ntly00from00the00investee’s00underlying00book00value00primarily00because00the00
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