Advanced Accounting, a a
5th Edition a
by Patrick Hopkins and Halsey
a a a a
Complete Chapter Solutions Manual areinclude
a a a a a
d (Ch 1 to 13) a a a a
** Immediate Download
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, Advanced Accounting
a a
Fifth Edition
a
ByaPatrickaE.aHopkinsaandaRobertaF.aHalsey
Solution Manual
a
Chapter 1— Accounting for Intercorporate Investments
a a a a a
1. a.aIfatheainvestoraacquireda100%aofatheainvesteeaatabookavalue,atheaEquityaInvestmentaac
countaisaequalatoatheaStockholders’aEquityaofatheainvesteeacompany.aIt,atherefore,ainc
ludesatheaassetsaandaliabilitiesaofatheainvesteeacompanyainaoneaaccount.aTheainvestor’
sabalanceasheet,atherefore,aincludesatheaStockholders’aEquityaofatheainvesteeacompan
y,aand,aimplicitly,aitsaassetsaandaliabilities.aInatheaconsolidationaprocess,atheabalanceas
heetsaofatheainvestoraandainvesteeacompanyaareabroughtatogether.aConsolidatedaSto
ckholders’aEquityawillabeatheasameaasathatawhichatheainvestoracurrentlyareports;aonlya
totalaassetsaandatotalaliabilitiesawillachange.
b. Ifatheainvestoraownsa100%aofatheainvestee,atheaequityaincomeathatatheainvestorareports
aisaequalatoatheanetaincomeaofatheainvestee,athusaimplicitlyaincludingaitsarevenuesaanda
expenses.aReplacingatheaequityaincomeawithathearevenuesaandaexpensesaofatheainves
teeacompanyainatheaconsolidationaprocessawillayieldatheasameanetaincome.
2. FASBa ASCa 323-
10a providesa thea followinga guidancea witha respecta toa thea accountinga forareceiptaofadivid
endsausingatheaequityamethod:
Theaequityamethodatendsatoabeamostaappropriateaifaanainvestmentaenablesatheain
vestoratoainfluenceatheaoperatingaorafinancialadecisionsaofatheainvestee.aTheainves
torathenahasaaadegreeaofaresponsibilityaforatheareturnaonaitsainvestment,aandaitaisa
appropriateatoaincludeainathearesultsaofaoperationsaofatheainvestoraitsashareaofathe
aearningsaoralossesaofatheainvestee.a (¶323-10-05-5)
Theaequityamethodaisaanaappropriateameansaofarecognizingaincreasesaoradecreasesameas
uredabyagenerallyaacceptedaaccountingaprinciplesa(GAAP)ainatheaeconomicaresourcesaunde
rlyingatheainvestments.aFurthermore,atheaequityamethodaofaaccountingamoreacloselyamee
tsatheaobjectivesaofaaccrualaaccountingathanadoesatheacostamethodabecauseatheainvestora
recognizesaitsashareaofatheaearningsaandalossesaofatheainvesteeainatheaperiodsainawhichath
eyaareareflectedainatheaaccountsaofatheainvestee.a (¶323-10-05-4)
Underatheaequityamethod,aanainvestorashallarecognizeaitsashareaofatheaearningsaoralossesa
ofaanainvesteeainatheaperiodsaforawhichatheyaareareportedabyatheainvesteeainaitsafinanciala
statementsaratherathanainatheaperiodainawhichaanainvesteeadeclaresaaadividenda(¶323-10-
a35-4).
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,3. Thearecognitionaofaequityaincomeadoesanotameanathatacashahasabeenareceived.aInafact,adi
videndsapaidabyatheainvesteeatoatheainvestoraareatypicallyaaasmallapercentageaofaitsarepor
tedanetaincome.aTheaprojectionaofafutureanetaincomeathataincludesaequityaincomeaasaaasig
nificantacomponentamightanot,atherefore,aimplyasignificantagenerationaofacash.
4. TheaaccountingaforaAltria’sainvestmentainaABIadependsaonatheadegreeaofainfluenceaoracon
trolaitacanaexertaoverathatacompany.aAaclassificationaofa“noainfluence”adoesanotaappearaap
propriateasinceaAltriaaownsa10.1%aofatheaoutstandingacommonastockaandaalsoa“activearep
resentationaonaABI’saBoardaofaDirectorsa(“ABIaBoard”)aandacertainaABIaBoardacommittees
.aThroughathisarepresentation,aAltriaaparticipatesainaABIapolicyamakingaprocesses.”aAaclass
ificationaofa“significantainfluence”aseemsamostaappropriateagivenatheafacts,aandathisaclass
ificationawarrantsaaccountingaforatheainvestmentausingatheaequityamethodaofaaccounting.
5. a.aAnainvestoramayawriteadownatheacarryingaamountaofaitsaEquityaInvestmentaifatheafairav
alueaofathatainvestmentahasadeclinedabelowaitsacarryingavalueaandathatadeclineaisadee
medatoabeaotherathanatemporary.
b. Thereaisaconsiderableajudgmentainadeterminingawhetheraaadeclineainafairavalueaisaothe
rathanatemporary.aTheawrite-
downaamountsatoaaapredictionathatatheafutureafairavalueaofatheainvestmentawillanotaris
eaaboveatheacurrentacarryingaamount.aIfaaacompanyadeemsatheadeclineatoabeatempor
ary,aitadoesanotawriteadownatheainvestment,aandaaalossaisanotarecognizedainaitsaincome
astatement.aIfatheadeclineaisadeemedatoabeaotherathanatemporary,atheainvestmentaisa
writtenadownaandaaalossaisareported.aCompaniesacanauseathisaflexibilityatoadecideawhet
heratoarecognizeaaalossainatheacurrentayearaoratoapostponeaitatoaaafutureayear.
6. Underatheaequityamethod,aanainvestorarecognizesaitsashareaofatheaearningsaoralossesaofaa
nainvesteeainatheaperiodsaforawhichatheyaareareportedabyatheainvesteeainaitsafinancialastate
ments.aFASBaASCa323-10-35-7astatesathata“Intra-
entityaprofitsaandalossesashallabeaeliminatedauntilarealizedabyatheainvestoraorainvesteeaasaifa
theainvesteeawereaconsolidated.”aTheseaintercompanyaitemsaareaeliminatedatoaavoidadou
bleacountingaandaprematurelyarecognizingaincome.
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1-2 AdvancedaAccounting,a5thaEditio
n
, 7. FASBaASCa323-10-
15arequiresatheauseaofatheaequityamethodaofaaccountingaforaanainvestorawhoseainvestmen
tainavotingastockagivesaitatheaabilityatoaexerciseasignificantainfluenceaoveraoperatingaandafin
ancialapoliciesaofaanainvestee.aSectiona15-
6astatesathata“Abilityatoaexerciseasignificantainfluenceaoveraoperatingaandafinancialapoliciesa
ofaanainvesteeamayabeaindicatedainaseveralaways,aincludingatheafollowing:aRepresentationa
onatheaboardaofadirectors,aParticipationainapolicy-makingaprocesses,aMaterialaintra-
entityatransactions,achangeaofamanagerialapersonnel,aTechnologicaladependency,aandaExt
entaofaownershipabyaanainvestorainarelationatoatheaconcentrationaofaotherashareholdingsa(
butasubstantialaoramajorityaownershipaofatheavotingastockaofaanainvesteeabyaanotherainve
storadoesanotanecessarilyaprecludeatheaabilityatoaexerciseasignificantainfluenceabyatheainv
estor)”a(emphasisaadded).aItaisaclear,ainathisacase,athatatheainvesteeaisacriticallyadependen
tauponatheatechnologyalicensedatoaitabyatheainvestor.aTheainvestorashould,atherefore,aacc
ountaforaitsainvestmentausingatheaequityamethod.
8. Evenathoughatheainvestoraownsa30%aofatheainvestee,aitashouldanotauseatheaequityametho
daasaitacannotaexertasignificantainfluenceaoveratheainvestee.aFurther,asinceatheainvesteeaisan
otaaapublicacompanya(allaofathearemainingastockaisaprivatelyaheld),atheainvestorashouldausea
theacostamethodatoaaccountaforathisainvestmentaasatheafairavalueamethodapresumesaaapub
liclyatradedastockawithasufficientaliquidityatoareasonablyadetermineaaafairavalue.
9. a.aThealossesadidanotaaffectaEnron’saincomeastatement.aSinceatheainvesteesawereainsolve
nt,aEnron’saEquityaInvestmentawasareducedatoazeroa(itahadanotamadeaanyaloansaoraoth
eraadvancesatoatheainvesteeacompanies).aAsaaaresult,aEnronadiscontinuedareportingafo
ratheseaEquityaInvestmentsausingatheaequityamethodaand,atherefore,adidanotarecogniz
eaitsaproportionateashareaofainvesteealosses.
b. “…aonlyaafteraitsashareaofathatanetaincomeaequalsatheashareaofanetalossesanotarecognize
daduringatheaperiodatheaequityamethodawasasuspended”ameansathatatheainvesteeahasa
recoupedaallaofathealossesathatahaveabeenareported.aSinceatheainvestoraceasesatoaacco
untaforaitsaEquityaInvestmentausingatheaequityamethodaonceatheabalanceareachesazero
a(assumingathataitahasanotaguaranteedatheadebtsaofatheainvesteeacompany),athisagene
rallyaimpliesathatatheainvestee’saStockholders’aEquityaisabelowazeroa(i.e.,aaadeficit).aThea
investoraresumesaitsaaccountingaforatheaEquityainvestmentausingatheaequityamethoda
onceatheainvestee’saStockholders’aEquityaisapositive.aItaisaatathatapointawhenatheainves
teeacompanyahasarecoupedaallaofaitsaprioralossesa(assumingathatatheainvesteeacompan
yahasanotaraisedaadditionalaequityacapital).
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