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SOLUTIONS MANUAL for Advanced Accounting, 15th Edition by Joe Ben Hoyle, Schaefer and Doupnik| Instant Download
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SOLUTIONS MANUAL for Advanced Accounting, 15th Edition by Joe Ben Hoyle, Schaefer and Doupnik| Instant Download

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  • October 22, 2024
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SOLUTIONS MANUAL For Advanced Accounting,
15th Edition By Joe Ben Hoyle, Schaefer And Doupnik

,ACCESS Test Bank For Advanced Accounting 15th Edition Hoyle
Chapter 01 - The Equity Method Of Accounting For Investments – Hoyle, Schaefer, Doupnik, Advanced
Accounting, 15e


CHAPTER 1
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS

Chapter Outline

I. Four Methods Are Principally Used To Account For An Investment In Equity Securities
Along With A Fair Value Option.

A. Fair Value Method: Applied By An Investor When Only A Small Percentage
Of A Company’s Voting Stock Is Held.

1. The Investor Recognizes Income When The Investee Declares A Dividend.

2. Portfolios Are Reported At Fair Value. If Fair Values Are Unavailable,
Investment Is Reported At Cost.

B. Cost Method: Applied To Investments Without A Readily Determinable Fair Value.
When The Fair Value Of An Investment In Equity Securities Is Not Readily
Determinable, And The Investment Provides Neither Significant Influence Nor
Control, The Investment May Be Measured At Cost. The Investment Remains At
Cost Unless

1. A Demonstrable Impairment Occurs For The Investment, Or

2. An Observable Price Change Occurs For Identical Or Similar Investments Of The
Same Issuer.
The Investor Typically Recognizes Its Share Of Investee Dividends Declared As Dividend
Income.

C. Consolidation: When One Firm Controls Another (E.G., When A Parent Has A
Majority Interest In The Voting Stock Of A Subsidiary Or Control Through Variable
Interests, Their Financial Statements Are Consolidated And Reported For The
Combined Entity.

D. Equity Method: Applied When The Investor Has The Ability To Exercise
Significant Influence Over Operating And Financial Policies Of The Investee.

1. Ability To Significantly Influence Investee Is Indicated By Several Factors
Including Representation On The Board Of Directors, Participation In Policy-
Making, Etc.

2. GAAP Guidelines Presume The Equity Method Is Applicable If 20 To 50 Percent Of
The Outstanding Voting Stock Of The Investee Is Held By The Investor.

Current Financial Reporting Standards Allow Firms To Elect To Use Fair Value For Any
New Investment In Equity Shares Including Those Where The Equity Method Would
Otherwise Apply. However, The Option, Once Taken, Is Irrevocable. The Investor
Recognizes Both Investee Dividends And Changes In Fair Value Over Time As Income.

,ACCESS Test Bank For Advanced Accounting 15th Edition Hoyle
Chapter 01 - The Equity Method Of Accounting For Investments – Hoyle, Schaefer, Doupnik, Advanced
Accounting, 15e

II. Accounting For An Investment: The Equity Method

A. The Investor Adjusts The Investment Account To Reflect All Changes In The Equity
Of The Investee Company.

B. The Investor Accrues Investee Income When It Is Reported In The Investee’s
Financial Statements.

C. Dividends Declared By The Investee Create A Reduction In The Carrying Amount Of
The Investment Account. This Book Assumes All Investee Dividends Are Declared
And Paid In The Same Reporting Period.

III. Special Accounting Procedures Used In The Application Of The Equity Method
A. Reporting A Change To The Equity Method When The Ability To Significantly
Influence An Investee Is Achieved Through A Series Of Acquisitions.
1. Initial Purchase(S) Will Be Accounted For By Means Of The Fair Value Method
(Or At Cost) Until The Ability To Significantly Influence Is Attained.
2. When The Ability To Exercise Significant Influence Occurs Following A Series Of
Stock Purchases, The Investor Applies The Equity Method Prospectively. The
Total Fair Value At The Date Significant Influence Is Attained Is Compared To
The Investee’s Book Value To Determine Future Excess Fair Value
Amortizations.
B. Investee Income From Other Than Continuing Operations
1. The Investor Recognizes Its Share Of Investee Reported Other
Comprehensive Income (OCI) Through The Investment Account And The
Investor’s Own OCI.
2. Income Items Such As Discontinued Operations That Are Reported Separately By
The Investee Should Be Shown In The Same Manner By The Investor. The
Materiality Of These Other Investee Income Elements (As It Affects The Investor)
Continues To Be A Criterion For Separate Disclosure.
C. Investee Losses
1. Losses Reported By The Investee Create Corresponding Losses For The Investor.
2. A Permanent Decline In The Fair Value Of An Investee’s Stock Should Be
Recognized Immediately By The Investor As An Impairment Loss.
3. Investee Losses Can Possibly Reduce The Carrying Value Of The Investment
Account To A Zero Balance. At That Point, The Equity Method Ceases To Be
Applicable And The Fair-Value Method Is Subsequently Used.
D. Reporting The Sale Of An Equity Investment
1. The Investor Applies The Equity Method Until The Disposal Date To Establish A
Proper Book Value.
2. Following The Sale, The Equity Method Continues To Be Appropriate If Enough
Shares Are Still Held To Maintain The Investor’s Ability To Significantly Influence
The Investee. If That Ability Has Been Lost, The Fair-Value Method Is
Subsequently Used.

IV. Excess Investment Cost Over Book Value Acquired
A. The Price An Investor Pays For Equity Securities Often Differs Significantly
From The Investee’s Underlying Book Value Primarily Because The Historical
Cost Based Accounting Model Does Not Keep Track Of Changes In A Firm’s
Fair Value.
B. Payments Made In Excess Of Underlying Book Value Can Sometimes Be Identified
With Specific Investee Accounts Such As Inventory Or Equipment.

, C. An Extra Acquisition Price Can Also Be Assigned To Anticipated Benefits That Are
Expected To Be Derived From The Investment. In Accounting, These Amounts Are
Presumed To Reflect An Intangible Asset Referred To As Goodwill. Goodwill Is
Calculated
Chapter 01 - The Equity Method Of Accounting For Investments – Hoyle, Schaefer, Doupnik, Advanced
Accounting, 15e

As Any Excess Payment That Is Not Attributable To Specific Identifiable Assets And
Liabilities Of The Investee. Because Goodwill Is An Indefinite-Lived Asset, It Is Not
Amortized.

V. Deferral Of Intra-Entity Gross Profit In Inventory
A. The Investor’s Share Of Intra-Entity Profits In Ending Inventory Are Not Recognized
Until The Transferred Goods Are Either Consumed Or Until They Are Resold To
Unrelated Parties.
B. Downstream Sales Of Inventory
1. “Downstream” Refers To Transfers Made By The Investor To The Investee.
2. Intra-Entity Gross Profits From Sales Are Initially Deferred Under The Equity
Method And Then Recognized As Income At The Time Of The Inventory’s
Eventual Disposal.
3. The Amount Of Gross Profit To Be Deferred Is The Investor’s Ownership
Percentage Multiplied By The Markup On The Merchandise Remaining At The
End Of The Year.
C. Upstream Sales Of Inventory
1. “Upstream” Refers To Transfers Made By The Investee To The Investor.
2. Under The Equity Method, The Deferral Process For Intra-Entity Gross Profits Is
Identical For Upstream And Downstream Transfers. The Procedures Are
Separately Identified In Chapter One Because The Handling Does Vary Within
The Consolidation Process.


Answers To Discussion Questions
The Textbook Includes Discussion Questions To Stimulate Student Thought And Discussion.
These Questions Are Also Designed To Allow Students To Consider Relevant Issues That Might
Otherwise Be Overlooked. Some Of These Questions May Be Addressed By The Instructor In
Class To Motivate Student Discussion. Students Should Be Encouraged To Begin By Defining
The Issue(S) In Each Case. Next, Authoritative Accounting Literature (FASB ASC) Or Other
Relevant Literature Can Be Consulted As A Preliminary Step In Arriving At Logical Actions.
Frequently, The FASB Accounting Standards Codification Will Provide The Necessary Support.

Unfortunately, In Accounting, Definitive Resolutions To Financial Reporting Questions Are Not
Always Available. Students Often Seem To Believe That All Accounting Issues Have Been
Resolved In The Past So That Accounting Education Is Only A Matter Of Learning To Apply
Historically Prescribed Procedures. However, In Actual Practice, The Only Real Answer Is Often
The One That Provides The Fairest Representation Of The Firm’s Transactions. If An
Authoritative Solution Is Not Available, Students Should Be Directed To List All Of The Issues
Involved And The Consequences Of Possible Alternative Actions. The Various Factors Presented
Can Be Weighed To Produce A Viable Solution.

The Discussion Questions Are Designed To Help Students Develop Research And Critical
Thinking Skills In Addressing Issues That Go Beyond The Purely Mechanical Elements Of
Accounting.

Did The Cost Method Invite Manipulation?
The Cost Method Of Accounting For Investments Often Caused A Lack Of Objectivity In
Reported Income Figures. With A Large Block Of The Investee’s Voting Shares, An Investor
Could Influence The Amount And Timing Of The Investee’s Dividend Declarations. Thus, When
Enjoying A Good Earnings Year, An Investor Might Influence The Investee To Withhold Declaring

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