Advanced Accounting 5th Edition Solution Manual by Hopkins & Halsey – Chapter 1-4 Complete Solutions

Advanced Accounting,
V



5th Edition
V



by Patrick Hopkins and Halsey
V V V V

, AdvancedVAccountingV
FifthVEdition
ByVPatrickVE.VHopkinsVandVRobertVF.VHalsey


SolutionV Manual

ChapterV 1—VAccountingV forV IntercorporateV Investments
V



1. a.VIfVtheVinvestorVacquiredV100%VofVtheVinvesteeVatVbookVvalue,VtheVEquityVInvestme
ntVaccountVisVequalVtoVtheVStockholders’VEquityVofVtheVinvesteeVcompany.VIt,Vthe
refore,VincludesVtheVassetsVandVliabilitiesVofVtheVinvesteeVcompanyVinVoneVaccou
nt.VTheVinvestor’sVbalanceVsheet,Vtherefore,VincludesVtheVStockholders’VEquityVofV
theVinvesteeVcompany,Vand,Vimplicitly,VitsVassetsVandVliabilities.VInVtheVconsolidati
onVprocess,VtheVbalanceVsheetsVofVtheVinvestorVandVinvesteeVcompanyVareVbroug
htVtogether.VConsolidatedVStockholders’VEquityVwillVbeVtheVsameVasVthatVwhichVt
heVinvestorVcurrentlyVreports;VonlyVtotalVassetsVandVtotalVliabilitiesVwillVchange.

b. IfVtheVinvestorVownsV100%VofVtheVinvestee,VtheVequityVincomeVthatVtheVinvestorVr
eportsVisVequalVtoVtheVnetVincomeVofVtheVinvestee,VthusVimplicitlyVincludingVitsVr
evenuesVandVexpenses.VReplacingVtheVequityVincomeVwithVtheVrevenuesVandVexp
ensesVofVtheVinvesteeVcompanyVinVtheVconsolidationVprocessVwillVyieldVtheVsameV
netVincome.

2. FASBV ASCV 323-
10V providesV theV followingV guidanceV withV respectV toVtheV accountingV forVreceiptVof
VdividendsVusingVtheVequityVmethod:


TheVequityVmethodVtendsVtoVbeVmostVappropriateVifVanVinvestmentVenablesVt
heVinvestorVtoVinfluenceVtheVoperatingVorVfinancialVdecisionsVofVtheVinvestee.
VTheVinvestorVthenVhasVaVdegreeVofVresponsibilityVforVtheVreturnVonVitsVinvest
ment,VandVitVisVappropriateVtoVincludeVinVtheVresultsVofVoperationsVofVtheVinv
estorVitsVshareVofVtheVearningsVorVlossesVofVtheVinvestee.V(¶323-10-05-5)

TheVequityVmethodVisVanVappropriateVmeansVofVrecognizingVincreasesVorVdecreasesV
measuredVbyVgenerallyVacceptedVaccountingVprinciplesV(GAAP)VinVtheVeconomicVresou
rcesVunderlyingVtheVinvestments.VFurthermore,VtheVequityVmethodVofVaccountingVmor
eVcloselyVmeetsVtheVobjectivesVofVaccrualVaccountingVthanVdoesVtheVcostVmethodVbe
causeVtheVinvestorVrecognizesVitsVshareVofVtheVearningsVandVlossesVofVtheVinvesteeVi
nVtheVperiodsVinVwhichVtheyVareVreflectedVinVtheVaccountsVofVtheVinvestee.V(¶323-
10-05-4)

UnderVtheVequityVmethod,VanVinvestorVshallVrecognizeVitsVshareVofVtheVearningsVorVl
ossesVofVanVinvesteeVinVtheVperiodsVforVwhichVtheyVareVreportedVbyVtheVinvesteeVinV
itsVfinancialVstatementsVratherVthanVinVtheVperiodVinVwhichVanVinvesteeVdeclaresVaVdi
videndV(¶323-10-V35-4).

,3. TheVrecognitionVofVequityVincomeVdoesVnotVmeanVthatVcashVhasVbeenVreceived.VInVf
act,VdividendsVpaidVbyVtheVinvesteeVtoVtheVinvestorVareVtypicallyVaVsmallVpercentage
VofVitsVreportedVnetVincome.VTheVprojectionVofVfutureVnetVincomeVthatVincludesVequit
yVincomeVasVaVsignificantVcomponentVmightVnot,Vtherefore,VimplyVsignificantVgenerati
onVofVcash.

4. TheVaccountingVforVAltria’sVinvestmentVinVABIVdependsVonVtheVdegreeVofVinfluenceVo
rVcontrolVitVcanVexertVoverVthatVcompany.VAVclassificationVofV“noVinfluence”VdoesVnot
VappearVappropriateVsinceVAltriaVownsV10.1%VofVtheVoutstandingVcommonVstockVand
ValsoV“activeVrepresentationVonVABI’sVBoardVofVDirectors V(“ABIVBoard”)VandVcertainV
ABIVBoardVcommittees.VThroughVthisVrepresentation,VAltriaVparticipatesVinVABIVpolicy
VmakingVprocesses.”VAVclassificationVofV“significantVinfluence”VseemsVmostVappropria
teVgivenVtheVfacts,VandVthisVclassificationVwarrantsVaccountingVforVtheVinvestmentVus
ingVtheVequityVmethodVofVaccounting.

5. a.VAnVinvestorVmayVwriteVdownVtheVcarryingVamountVofVitsVEquityVInvestmentVifVthe
VfairVvalueVofVthatVinvestmentVhasVdeclinedVbelowVitsVcarryingVvalueVandVthatVde
clineVisVdeemedVtoVbeVotherVthanVtemporary.

b. ThereVisVconsiderableVjudgmentVinVdeterminingVwhetherVaVdeclineVinVfairVvalueVisV
otherVthanVtemporary.VTheVwrite-
downVamountsVtoVaVpredictionVthatVtheVfutureVfairVvalueVofVtheVinvestmentVwillV
notVriseVaboveVtheVcurrentVcarryingVamount.VIfVaVcompanyVdeemsVtheVdeclineVto
VbeVtemporary,VitVdoesVnotVwriteVdownVtheVinvestment,VandVaVlossVisVnotVrecogni
zedVinVitsVincomeVstatement.VIfVtheVdeclineVisVdeemedVtoVbeVotherVthanVtempor
ary,VtheVinvestmentVisVwrittenVdownVandVaVlossVisVreported.VCompaniesVcanVuseVt
hisVflexibilityVtoVdecideVwhetherVtoVrecognizeVaVlossVinVtheVcurrentVyearVorVtoVpost
poneVitVtoVaVfutureVyear.

6. UnderVtheVequityVmethod,VanVinvestorVrecognizesVitsVshareVofVtheVearningsVorVlosses
VofVanVinvesteeVinVtheVperiodsVforVwhichVtheyVareVreportedVbyVtheVinvesteeVinVitsVfi
nancialVstatements.VFASBVASCV323-10-35-7VstatesVthatV“Intra-
entityVprofitsVandVlossesVshallVbeVeliminatedVuntilVrealizedVbyVtheVinvestorVorVinvesteeV
asVifVtheVinvesteeVwereVconsolidated.”VTheseVintercompanyVitemsVareVeliminatedVtoVa
voidVdoubleVcountingVandVprematurelyVrecognizingVincome.




2023
1-2 AdvancedV Accounting,V5thVEditi
on

, 7. FASBVASCV323-10-
15VrequiresVtheVuseVofVtheVequityVmethodVofVaccountingVforVanVinvestorVwhoseVinve
stmentVinVvotingVstockVgivesVitVtheVabilityVtoVexerciseVsignificantVinfluenceVoverVopera
tingVandVfinancialVpoliciesVofVanVinvestee.VSectionV15-
6VstatesVthatV“AbilityVtoVexerciseVsignificantVinfluenceVoverVoperatingVandVfinancialVpoli
ciesVofVanVinvesteeVmayVbeVindicatedVinVseveralVways,VincludingVtheVfollowing:VRepre
sentationVonVtheVboardVofVdirectors,VParticipationVinVpolicy-
makingVprocesses,VMaterialVintra-
entityVtransactions,VchangeVofVmanagerialVpersonnel,VTechnologicalVdependency,VandV
ExtentVofVownershipVbyVanVinvestorVinVrelationVtoVtheVconcentrationVofVotherVshareh
oldingsV(butVsubstantialVorVmajorityVownershipVofVtheVvotingVstockVofVanVinvesteeVb
yVanotherVinvestorVdoesVnotVnecessarilyVprecludeVtheVabilityVtoVexerciseVsignificantVi
nfluenceVbyVtheVinvestor)”V(emphasisVadded).VItVisVclear,VinVthisVcase,VthatVtheVinvest
eeVisVcriticallyVdependentVuponVtheVtechnologyVlicensedVtoVitVbyVtheVinvestor.VTheVi
nvestorVshould,Vtherefore,VaccountVforVitsVinvestmentVusingVtheVequityVmethod.

8. EvenVthoughVtheVinvestorVownsV30%VofVtheVinvestee,VitVshouldVnotVuseVtheVequityVm
ethodVasVitVcannotVexertVsignificantVinfluenceVoverVtheVinvestee.VFurther,VsinceVtheVin
vesteeVisVnotVaVpublicVcompanyV(allVofVtheVremainingVstockVisVprivatelyVheld),VtheVinve
storVshouldVuseVtheVcostVmethodVtoVaccountVforVthisVinvestmentVasVtheVfairVvalueVm
ethodVpresumesVaVpubliclyVtradedVstockVwithVsufficientVliquidityVtoVreasonablyVdeter
mineVaVfairVvalue.

9. a.VTheVlossesVdidVnotVaffectVEnron’sVincomeVstatement.VSinceVtheVinvesteesVwereVins
olvent,VEnron’sVEquityVInvestmentVwasVreducedVtoVzeroV(itVhadVnotVmadeVanyVloa
nsVorVotherVadvancesVtoVtheVinvesteeVcompanies).VAsVaVresult,VEnronVdiscontinue
dVreportingVforVtheseVEquityVInvestmentsVusingVtheVequityVmethodVand,Vtherefor
e,VdidVnotVrecognizeVitsVproportionateVshareVofVinvesteeVlosses.

b. “…VonlyVafterVitsVshareVofVthatVnetVincomeVequalsVtheVshareVofVnetVlossesVnotVrecog
nizedVduringVtheVperiodVtheVequityVmethodVwasVsuspended”VmeansVthatVtheVinv
esteeVhasVrecoupedVallVofVtheVlossesVthatVhaveVbeenVreported.VSinceVtheVinvesto
rVceasesVtoVaccountVforVitsVEquityVInvestmentVusingVtheVequityVmethodVonceVthe
VbalanceVreachesVzeroV(assumingVthatVitVhasVnotVguaranteedVtheVdebtsVofVtheVin
vesteeVcompany),VthisVgenerallyVimpliesVthatVtheVinvestee’sVStockholders’VEquityVi
sVbelowVzeroV(i.e.,VaVdeficit).VTheVinvestorVresumesVitsVaccountingVforVtheVEquityVi
nvestmentVusingVtheVequityVmethodVonceVtheVinvestee’sVStockholders’VEquityVisV
positive.VItVisVatVthatVpointVwhenVtheVinvesteeVcompanyVhasVrecoupedVallVofVitsV
priorVlossesV(assumingVthatVtheVinvesteeVcompanyVhasVnotVraisedVadditionalVequi
tyVcapital).