AdvancedgAccounting,
5th Edition
g
by Patrick Hopkins and Halsey
g g g g
, AdvancedgAccountinggF
ifthgEdition
BygPatrickgE.gHopkinsgandgRobertgF.gHalsey
Solutiong Manual
Chapterg 1—gAccountingg forg Intercorporateg Investments
g
1. a.gIfgtheginvestorgacquiredg100%gofgtheginvesteegatgbookgvalue,gthegEquitygInvestmentg
accountgisgequalgtogthegStockholders’gEquitygofgtheginvesteegcompany.gIt,gtherefore
,gincludesgthegassetsgandgliabilitiesgofgtheginvesteegcompanygingonegaccount.gThegin
vestor’sgbalancegsheet,gtherefore,gincludesgthegStockholders’gEquitygofgtheginvesteeg
company,gand,gimplicitly,gitsgassetsgandgliabilities.gIngthegconsolidationgprocess,gtheg
balancegsheetsgofgtheginvestorgandginvesteegcompanygaregbroughtgtogether.gConsol
idatedgStockholders’gEquitygwillgbegthegsamegasgthatgwhichgtheginvestorgcurrentlygr
eports;gonlygtotalgassetsgandgtotalgliabilitiesgwillgchange.
b. Ifgtheginvestorgownsg100%gofgtheginvestee,gthegequitygincomegthatgtheginvestorgrepor
tsgisgequalgtogthegnetgincomegofgtheginvestee,gthusgimplicitlygincludinggitsgrevenuesg
andgexpenses.gReplacinggthegequitygincomegwithgthegrevenuesgandgexpensesgofgthe
ginvestee gcompanygingthegconsolidationgprocessgwillgyieldgthegsame gnetgincome.
2. FASBg ASCg 323-
10g providesg theg followingg guidanceg withg respectg togtheg accountingg forgreceiptgofgdiv
idendsgusinggthegequitygmethod:
Thegequitygmethodgtendsgtogbegmostgappropriategifganginvestmentgenablesgtheg
investorgtoginfluencegthegoperatinggorgfinancialgdecisionsgofgtheginvestee.gThegi
nvestorgthenghasgagdegreegofgresponsibilitygforgthegreturngongitsginvestment,gan
dgitgisgappropriategtogincludegingthegresultsgofgoperationsgofgtheginvestorgitsgshar
egofgthegearningsgorglossesgofgtheginvestee.g(¶323-10-05-5)
Thegequitygmethodgisgangappropriategmeansgofgrecognizinggincreasesgorgdecreasesgme
asuredgbyggenerallygacceptedgaccountinggprinciplesg(GAAP)gingthegeconomicgresourcesgu
nderlyinggtheginvestments.gFurthermore,gthegequitygmethodgofgaccountinggmoregclosely
gmeetsgthegobjectivesgofgaccrualgaccountinggthangdoesgthegcostgmethodgbecausegthegin
vestorgrecognizesgitsgsharegofgthegearningsgandglossesgofgtheginvesteegingthegperiodsging
whichgtheygaregreflectedgingthegaccountsgofgtheginvestee.g(¶323-10-05-4)
Undergthegequitygmethod,ganginvestorgshallgrecognizegitsgsharegofgthegearningsgorglosse
sgofganginvesteegingthegperiodsgforgwhichgtheygaregreportedgbygtheginvesteegingitsgfinan
cialgstatementsgrathergthangingthegperiodgingwhichganginvesteegdeclaresgagdividendg(¶3
23-10-g35-4).
,3. Thegrecognitiongofgequitygincomegdoesgnotgmeangthatgcashghasgbeengreceived.gIngfact,g
dividendsgpaidgbygtheginvesteegtogtheginvestorgaregtypicallygagsmallgpercentagegofgitsgre
portedgnetgincome.gThegprojectiongofgfuturegnetgincomegthatgincludesgequitygincomegasg
agsignificantgcomponentgmightgnot,gtherefore,gimplygsignificantggenerationgofgcash.
4. ThegaccountinggforgAltria’sginvestmentgingABIgdependsgongthegdegreegofginfluencegorgc
ontrolgitgcangexertgovergthatgcompany.gAgclassificationgofg“noginfluence”gdoesgnotgappea
rgappropriategsincegAltriagownsg10.1%gofgthegoutstandinggcommongstockgandgalsog“acti
vegrepresentationgongABI’sgBoardgofgDirectorsg(“ABIgBoard”)gandgcertaingABIgBoardgco
mmittees.gThroughgthisgrepresentation,gAltriagparticipatesgingABIgpolicygmakinggprocess
es.”gAgclassificationgofg“significantginfluence”gseemsgmostgappropriateggivengthegfacts,g
andgthisgclassificationgwarrantsgaccountinggforgtheginvestmentgusinggthegequitygmetho
dgofgaccounting.
5. a.gAnginvestorgmaygwritegdowngthegcarryinggamountgofgitsgEquitygInvestmentgifgthegfair
gvaluegofgthatginvestmentghasgdeclinedgbelowgitsgcarryinggvaluegandgthatgdeclinegisg
deemedgtogbegothergthangtemporary.
b. Theregisgconsiderablegjudgmentgingdetermininggwhethergagdeclinegingfairgvaluegisgoth
ergthangtemporary.gThegwrite-
downgamountsgtogagpredictiongthatgthegfuturegfairgvaluegofgtheginvestmentgwillgnotg
risegabovegthegcurrentgcarryinggamount.gIfgagcompanygdeemsgthegdeclinegtogbegtem
porary,gitgdoesgnotgwritegdowngtheginvestment,gandgaglossgisgnotgrecognizedgingitsgin
comegstatement.gIfgthegdeclinegisgdeemedgtogbegothergthangtemporary,gtheginvestm
entgisgwrittengdowngandgaglossgisgreported.gCompaniesgcangusegthisgflexibilitygtogdeci
degwhethergtogrecognizegaglossgingthegcurrentgyeargorgtogpostponegitgtogagfuturegyear
.
6. Undergthegequitygmethod,ganginvestorgrecognizesgitsgsharegofgthegearningsgorglossesgofg
anginvesteegingthegperiodsgforgwhichgtheygaregreportedgbygtheginvesteegingitsgfinancialgs
tatements.gFASBgASCg323-10-35-7gstatesgthatg“Intra-
entitygprofitsgandglossesgshallgbegeliminatedguntilgrealizedgbygtheginvestorgorginvesteegasgif
gtheginvesteegweregconsolidated.”gThesegintercompanygitemsgaregeliminatedgtogavoidgdo
ublegcountinggandgprematurelygrecognizinggincome.
2023
1-2 Advancedg Accounting,g5thgEditio
n
, 7. FASBgASCg323-10-
15grequiresgthegusegofgthegequitygmethodgofgaccountinggforganginvestorgwhoseginvestm
entgingvotinggstockggivesgitgthegabilitygtogexercisegsignificantginfluencegovergoperatinggan
dgfinancialgpoliciesgofganginvestee.gSectiong15-
6gstatesgthatg“Abilitygtogexercisegsignificantginfluencegovergoperatinggandgfinancialgpolicie
sgofganginvesteegmaygbegindicatedgingseveralgways,gincludinggthegfollowing:gRepresentati
ongongthegboardgofgdirectors,gParticipationgingpolicy-makinggprocesses,gMaterialgintra-
entitygtransactions,gchangegofgmanagerialgpersonnel,gTechnologicalgdependency,gandgExt
entgofgownershipgbyganginvestorgingrelationgtogthegconcentrationgofgothergshareholdings
g(butgsubstantialgorgmajoritygownershipgofgthegvotinggstockgofganginvesteegbyganothergi
nvestorgdoesgnotgnecessarilygprecludegthegabilitygtogexercisegsignificantginfluencegbygth
eginvestor)”g(emphasisgadded).gItgisgclear,gingthisgcase,gthatgtheginvesteegisgcriticallygdep
endentgupongthegtechnologyglicensedgtogitgbygtheginvestor.gTheginvestorgshould,gtheref
ore,gaccountgforgitsginvestmentgusinggthegequitygmethod.
8. Evengthoughgtheginvestorgownsg30%gofgtheginvestee,gitgshouldgnotgusegthegequitygmeth
odgasgitgcannotgexertgsignificantginfluencegovergtheginvestee.gFurther,gsincegtheginvesteegi
sgnotgagpublicgcompanyg(allgofgthegremaininggstockgisgprivatelygheld),gtheginvestorgshould
gusegthegcostgmethodgtogaccountgforgthisginvestmentgasgthegfairgvaluegmethodgpresume
sgagpubliclygtradedgstockgwithgsufficientgliquiditygtogreasonablygdeterminegagfairgvalue.
9. a.gTheglossesgdidgnotgaffectgEnron’sgincomegstatement.gSincegtheginvesteesgwereginsolv
ent,gEnron’sgEquitygInvestmentgwasgreducedgtogzerog(itghadgnotgmadeganygloansgorg
othergadvancesgtogtheginvesteegcompanies).gAsgagresult,gEnrongdiscontinuedgreporti
nggforgthesegEquitygInvestmentsgusinggthegequitygmethodgand,gtherefore,gdidgnotgr
ecognizegitsgproportionategsharegofginvesteeglosses.
b. “…gonlygaftergitsgsharegofgthatgnetgincomegequalsgthegsharegofgnetglossesgnotgrecognize
dgduringgthegperiodgthegequitygmethodgwasgsuspended”gmeansgthatgtheginvesteegh
asgrecoupedgallgofgtheglossesgthatghavegbeengreported.gSincegtheginvestorgceasesgto
gaccountgforgitsgEquitygInvestmentgusinggthegequitygmethodgoncegthegbalancegreach
esgzerog(assuminggthatgitghasgnotgguaranteedgthegdebtsgofgtheginvesteegcompany),g
thisggenerallygimpliesgthatgtheginvestee’sgStockholders’gEquitygisgbelowgzerog(i.e.,gagd
eficit).gTheginvestorgresumesgitsgaccountinggforgthegEquityginvestmentgusinggthegeq
uitygmethodgoncegtheginvestee’sgStockholders’gEquitygisgpositive.gItgisgatgthatgpointg
whengtheginvesteegcompanyghasgrecoupedgallgofgitsgpriorglossesg(assuminggthatgthegi
nvesteegcompanyghasgnotgraisedgadditionalgequitygcapital).
5th Edition
g
by Patrick Hopkins and Halsey
g g g g
, AdvancedgAccountinggF
ifthgEdition
BygPatrickgE.gHopkinsgandgRobertgF.gHalsey
Solutiong Manual
Chapterg 1—gAccountingg forg Intercorporateg Investments
g
1. a.gIfgtheginvestorgacquiredg100%gofgtheginvesteegatgbookgvalue,gthegEquitygInvestmentg
accountgisgequalgtogthegStockholders’gEquitygofgtheginvesteegcompany.gIt,gtherefore
,gincludesgthegassetsgandgliabilitiesgofgtheginvesteegcompanygingonegaccount.gThegin
vestor’sgbalancegsheet,gtherefore,gincludesgthegStockholders’gEquitygofgtheginvesteeg
company,gand,gimplicitly,gitsgassetsgandgliabilities.gIngthegconsolidationgprocess,gtheg
balancegsheetsgofgtheginvestorgandginvesteegcompanygaregbroughtgtogether.gConsol
idatedgStockholders’gEquitygwillgbegthegsamegasgthatgwhichgtheginvestorgcurrentlygr
eports;gonlygtotalgassetsgandgtotalgliabilitiesgwillgchange.
b. Ifgtheginvestorgownsg100%gofgtheginvestee,gthegequitygincomegthatgtheginvestorgrepor
tsgisgequalgtogthegnetgincomegofgtheginvestee,gthusgimplicitlygincludinggitsgrevenuesg
andgexpenses.gReplacinggthegequitygincomegwithgthegrevenuesgandgexpensesgofgthe
ginvestee gcompanygingthegconsolidationgprocessgwillgyieldgthegsame gnetgincome.
2. FASBg ASCg 323-
10g providesg theg followingg guidanceg withg respectg togtheg accountingg forgreceiptgofgdiv
idendsgusinggthegequitygmethod:
Thegequitygmethodgtendsgtogbegmostgappropriategifganginvestmentgenablesgtheg
investorgtoginfluencegthegoperatinggorgfinancialgdecisionsgofgtheginvestee.gThegi
nvestorgthenghasgagdegreegofgresponsibilitygforgthegreturngongitsginvestment,gan
dgitgisgappropriategtogincludegingthegresultsgofgoperationsgofgtheginvestorgitsgshar
egofgthegearningsgorglossesgofgtheginvestee.g(¶323-10-05-5)
Thegequitygmethodgisgangappropriategmeansgofgrecognizinggincreasesgorgdecreasesgme
asuredgbyggenerallygacceptedgaccountinggprinciplesg(GAAP)gingthegeconomicgresourcesgu
nderlyinggtheginvestments.gFurthermore,gthegequitygmethodgofgaccountinggmoregclosely
gmeetsgthegobjectivesgofgaccrualgaccountinggthangdoesgthegcostgmethodgbecausegthegin
vestorgrecognizesgitsgsharegofgthegearningsgandglossesgofgtheginvesteegingthegperiodsging
whichgtheygaregreflectedgingthegaccountsgofgtheginvestee.g(¶323-10-05-4)
Undergthegequitygmethod,ganginvestorgshallgrecognizegitsgsharegofgthegearningsgorglosse
sgofganginvesteegingthegperiodsgforgwhichgtheygaregreportedgbygtheginvesteegingitsgfinan
cialgstatementsgrathergthangingthegperiodgingwhichganginvesteegdeclaresgagdividendg(¶3
23-10-g35-4).
,3. Thegrecognitiongofgequitygincomegdoesgnotgmeangthatgcashghasgbeengreceived.gIngfact,g
dividendsgpaidgbygtheginvesteegtogtheginvestorgaregtypicallygagsmallgpercentagegofgitsgre
portedgnetgincome.gThegprojectiongofgfuturegnetgincomegthatgincludesgequitygincomegasg
agsignificantgcomponentgmightgnot,gtherefore,gimplygsignificantggenerationgofgcash.
4. ThegaccountinggforgAltria’sginvestmentgingABIgdependsgongthegdegreegofginfluencegorgc
ontrolgitgcangexertgovergthatgcompany.gAgclassificationgofg“noginfluence”gdoesgnotgappea
rgappropriategsincegAltriagownsg10.1%gofgthegoutstandinggcommongstockgandgalsog“acti
vegrepresentationgongABI’sgBoardgofgDirectorsg(“ABIgBoard”)gandgcertaingABIgBoardgco
mmittees.gThroughgthisgrepresentation,gAltriagparticipatesgingABIgpolicygmakinggprocess
es.”gAgclassificationgofg“significantginfluence”gseemsgmostgappropriateggivengthegfacts,g
andgthisgclassificationgwarrantsgaccountinggforgtheginvestmentgusinggthegequitygmetho
dgofgaccounting.
5. a.gAnginvestorgmaygwritegdowngthegcarryinggamountgofgitsgEquitygInvestmentgifgthegfair
gvaluegofgthatginvestmentghasgdeclinedgbelowgitsgcarryinggvaluegandgthatgdeclinegisg
deemedgtogbegothergthangtemporary.
b. Theregisgconsiderablegjudgmentgingdetermininggwhethergagdeclinegingfairgvaluegisgoth
ergthangtemporary.gThegwrite-
downgamountsgtogagpredictiongthatgthegfuturegfairgvaluegofgtheginvestmentgwillgnotg
risegabovegthegcurrentgcarryinggamount.gIfgagcompanygdeemsgthegdeclinegtogbegtem
porary,gitgdoesgnotgwritegdowngtheginvestment,gandgaglossgisgnotgrecognizedgingitsgin
comegstatement.gIfgthegdeclinegisgdeemedgtogbegothergthangtemporary,gtheginvestm
entgisgwrittengdowngandgaglossgisgreported.gCompaniesgcangusegthisgflexibilitygtogdeci
degwhethergtogrecognizegaglossgingthegcurrentgyeargorgtogpostponegitgtogagfuturegyear
.
6. Undergthegequitygmethod,ganginvestorgrecognizesgitsgsharegofgthegearningsgorglossesgofg
anginvesteegingthegperiodsgforgwhichgtheygaregreportedgbygtheginvesteegingitsgfinancialgs
tatements.gFASBgASCg323-10-35-7gstatesgthatg“Intra-
entitygprofitsgandglossesgshallgbegeliminatedguntilgrealizedgbygtheginvestorgorginvesteegasgif
gtheginvesteegweregconsolidated.”gThesegintercompanygitemsgaregeliminatedgtogavoidgdo
ublegcountinggandgprematurelygrecognizinggincome.
2023
1-2 Advancedg Accounting,g5thgEditio
n
, 7. FASBgASCg323-10-
15grequiresgthegusegofgthegequitygmethodgofgaccountinggforganginvestorgwhoseginvestm
entgingvotinggstockggivesgitgthegabilitygtogexercisegsignificantginfluencegovergoperatinggan
dgfinancialgpoliciesgofganginvestee.gSectiong15-
6gstatesgthatg“Abilitygtogexercisegsignificantginfluencegovergoperatinggandgfinancialgpolicie
sgofganginvesteegmaygbegindicatedgingseveralgways,gincludinggthegfollowing:gRepresentati
ongongthegboardgofgdirectors,gParticipationgingpolicy-makinggprocesses,gMaterialgintra-
entitygtransactions,gchangegofgmanagerialgpersonnel,gTechnologicalgdependency,gandgExt
entgofgownershipgbyganginvestorgingrelationgtogthegconcentrationgofgothergshareholdings
g(butgsubstantialgorgmajoritygownershipgofgthegvotinggstockgofganginvesteegbyganothergi
nvestorgdoesgnotgnecessarilygprecludegthegabilitygtogexercisegsignificantginfluencegbygth
eginvestor)”g(emphasisgadded).gItgisgclear,gingthisgcase,gthatgtheginvesteegisgcriticallygdep
endentgupongthegtechnologyglicensedgtogitgbygtheginvestor.gTheginvestorgshould,gtheref
ore,gaccountgforgitsginvestmentgusinggthegequitygmethod.
8. Evengthoughgtheginvestorgownsg30%gofgtheginvestee,gitgshouldgnotgusegthegequitygmeth
odgasgitgcannotgexertgsignificantginfluencegovergtheginvestee.gFurther,gsincegtheginvesteegi
sgnotgagpublicgcompanyg(allgofgthegremaininggstockgisgprivatelygheld),gtheginvestorgshould
gusegthegcostgmethodgtogaccountgforgthisginvestmentgasgthegfairgvaluegmethodgpresume
sgagpubliclygtradedgstockgwithgsufficientgliquiditygtogreasonablygdeterminegagfairgvalue.
9. a.gTheglossesgdidgnotgaffectgEnron’sgincomegstatement.gSincegtheginvesteesgwereginsolv
ent,gEnron’sgEquitygInvestmentgwasgreducedgtogzerog(itghadgnotgmadeganygloansgorg
othergadvancesgtogtheginvesteegcompanies).gAsgagresult,gEnrongdiscontinuedgreporti
nggforgthesegEquitygInvestmentsgusinggthegequitygmethodgand,gtherefore,gdidgnotgr
ecognizegitsgproportionategsharegofginvesteeglosses.
b. “…gonlygaftergitsgsharegofgthatgnetgincomegequalsgthegsharegofgnetglossesgnotgrecognize
dgduringgthegperiodgthegequitygmethodgwasgsuspended”gmeansgthatgtheginvesteegh
asgrecoupedgallgofgtheglossesgthatghavegbeengreported.gSincegtheginvestorgceasesgto
gaccountgforgitsgEquitygInvestmentgusinggthegequitygmethodgoncegthegbalancegreach
esgzerog(assuminggthatgitghasgnotgguaranteedgthegdebtsgofgtheginvesteegcompany),g
thisggenerallygimpliesgthatgtheginvestee’sgStockholders’gEquitygisgbelowgzerog(i.e.,gagd
eficit).gTheginvestorgresumesgitsgaccountinggforgthegEquityginvestmentgusinggthegeq
uitygmethodgoncegtheginvestee’sgStockholders’gEquitygisgpositive.gItgisgatgthatgpointg
whengtheginvesteegcompanyghasgrecoupedgallgofgitsgpriorglossesg(assuminggthatgthegi
nvesteegcompanyghasgnotgraisedgadditionalgequitygcapital).
