AdvancedAccounting,
.
5th Edition
.
byPatrick Hopkinsand Halsey
. . . .
, Advanced Accounting Fi
. .
fth Edition
.
By.Patrick.E..Hopkins.and.Robert.F..Halsey
Solution Manual.
Chapter 1— Accounting for Intercorporate Investments
. . . . . .
1. a..If.the.investor.acquired.100%.of.the.investee.at.book.value,.the.Equity.Investment.accoun
t.is.equal.to.the.Stockholders’.Equity.of.the.investee.company..It,.therefore,.includes.the
.assets.and.liabilities .of.the.investee.company.in.one.account..The.investor’s .balance.she
et,.therefore,.includes.the.Stockholders’.Equity.of.the.investee.company,.and,.implicitly,
.its.assets.and.liabilities..In.the.consolidation.process,.the.balance.sheets .of.the.investor.
and.investee.company.are.brought.together..Consolidated.Stockholders’.Equity.will.be.
the.same.as.that.which.the.investor.currently.reports;.only.total.assets.and.total.liabiliti
es.will.change.
b. If.the.investor.owns.100%.of.the.investee,.the.equity.income.that.the.investor.reports.is.e
qual.to.the.net.income.of.the.investee,.thus.implicitly.including.its.revenues.and.expens
es..Replacing.the.equity.income.with.the.revenues.and.expenses.of.the.investee.compa
ny.in.the.consolidation.process.will.yield.the.same.net.income.
2. FASB. ASC. 323-
10. provides. the. following. guidance. with. respect. to.the. accounting. for.receipt.of.dividend
s.using.the.equity.method:
The.equity.method.tends.to.be.most.appropriate.if.an.investment.enables.the.inves
tor.to.influence.the.operating.or.financial.decisions.of.the.investee..The.investor.the
n.has.a.degree.of.responsibility.for.the.return.on.its.investment,.and.it.is.appropriate.
to.include.in.the.results.of.operations.of.the.investor.its.share.of.the.earnings.or.losse
s.of.the.investee..(¶323-10-05-5)
The.equity.method.is.an.appropriate.means.of.recognizing.increases.or.decreases.measure
d.by.generally.accepted.accounting.principles.(GAAP).in.the.economic.resources.underlying.t
he.investments..Furthermore,.the.equity.method.of.accounting.more.closely.meets.the.obje
ctives.of.accrual.accounting.than.does.the.cost.method.because.the.investor.recognizes.its.
share.of.the.earnings.and.losses.of.the.investee.in.the.periods.in.which.they.are.reflected.in.t
he.accounts.of.the.investee..(¶323-10-05-4)
Under.the.equity.method,.an.investor.shall.recognize.its.share.of.the.earnings.or.losses.of.an
.investee.in.the.periods .for.which.they.are.reported.by.the.investee.in.its.financial.statement
s.rather.than.in.the.period.in.which.an.investee.declares.a.dividend.(¶323-10-.35-4).
,3. The.recognition.of.equity.income.does.not.mean.that.cash.has.been.received..In.fact,.divide
nds.paid.by.the.investee.to.the.investor.are.typically.a.small.percentage.of.its.reported.net.in
come..The.projection.of.future.net.income.that.includes.equity.income.as.a.significant.comp
onent.might.not,.therefore,.imply.significant.generation.of.cash.
4. The.accounting.for.Altria’s.investment.in.ABI.depends.on.the.degree.of.influence.or.control.i
t.can.exert.over.that.company..A.classification.of.“no.influence”.does.not.appear.appropriate
.since.Altria.owns.10.1%.of.the.outstanding.common.stock.and.also.“active.representation.o
n.ABI’s.Board.of.Directors.(“ABI.Board”).and.certain.ABI.Board.committees..Through.this.rep
resentation,.Altria.participates.in.ABI.policy.making.processes.”.A.classification.of.“significa
nt.influence”.seems.most.appropriate.given.the.facts,.and.this.classification.warrants.accou
nting.for.the.investment.using.the.equity.method.of.accounting.
5. a..An.investor.may.write.down.the.carrying.amount.of.its.Equity.Investment.if.the.fair.value.
of.that.investment.has.declined.below.its.carrying.value.and.that.decline.is.deemed.to.b
e.other.than.temporary.
b. There.is.considerable.judgment.in.determining.whether.a.decline.in.fair.value.is.other.tha
n.temporary..The.write-
down.amounts.to.a.prediction.that.the.future.fair.value.of.the.investment.will.not.rise.ab
ove.the.current.carrying.amount..If.a.company.deems.the.decline.to.be.temporary,.it.do
es.not.write.down.the.investment,.and.a.loss.is.not.recognized.in.its.income.statement..If.
the.decline.is.deemed.to.be.other.than.temporary,.the.investment.is.written.down.and.a.l
oss.is.reported..Companies.can.use.this.flexibility.to.decide.whether.to.recognize.a.loss.in.t
he.current.year.or.to.postpone.it.to.a.future.year.
6. Under.the.equity.method,.an.investor.recognizes.its.share.of.the.earnings.or.losses.of.an.inve
stee.in.the.periods.for.which.they.are.reported.by.the.investee.in.its.financial.statements..FA
SB.ASC.323-10-35-7.states.that.“Intra-
entity.profits.and.losses.shall.be.eliminated.until.realized.by.the.investor.or.investee.as.if.the.in
vestee.were.consolidated.”.These.intercompany.items.are.eliminated.to.avoid.double.counti
ng.and.prematurely.recognizing.income.
2023
1-2 Advanced.Accounting,.5th.Edition
, 7. FASB.ASC.323-10-
15.requires.the.use.of.the.equity.method.of.accounting.for.an.investor.whose.investment.in.
voting.stock.gives.it.the.ability.to.exercise.significant.influence.over.operating.and.financial.po
licies.of.an.investee..Section.15-
6.states.that.“Ability.to.exercise.significant.influence.over.operating.and.financial.policies.of.a
n.investee.may.be.indicated.in.several.ways,.including.the.following:.Representation.on.the.
board.of.directors,.Participation.in.policy-making.processes,.Material.intra-
entity.transactions,.change.of.managerial.personnel,.Technological.dependency,.and.Extent.
of.ownership.by.an.investor.in.relation.to.the.concentration.of.other.shareholdings.(but.subs
tantial.or.majority.ownership.of.the.voting.stock.of.an.investee.by.another.investor.does.not
.necessarily.preclude.the.ability.to.exercise.significant.influence.by.the.investor)”.(emphasis
.added)..It.is.clear,.in.this.case,.that.the.investee.is.critically.dependent.upon.the.technology.l
icensed.to.it.by.the.investor..The.investor.should,.therefore,.account.for.its.investment.usin
g.the.equity.method.
8. Even.though.the.investor.owns.30%.of.the.investee,.it.should.not.use.the.equity.method.as.it.
cannot.exert.significant.influence.over.the.investee..Further,.since.the.investee.is.not.a.public.
company.(all.of.the.remaining.stock.is.privately.held),.the.investor.should.use.the.cost.metho
d.to.account.for.this.investment.as.the.fair.value.method.presumes.a.publicly.traded.stock.wi
th.sufficient.liquidity.to.reasonably.determine.a.fair.value.
9. a..The.losses.did.not.affect.Enron’s.income.statement..Since.the.investees.were.insolvent,.E
nron’s.Equity.Investment.was.reduced.to.zero.(it.had.not.made.any.loans.or.other.advan
ces.to.the.investee.companies)..As.a.result,.Enron.discontinued.reporting.for.these.Equi
ty.Investments.using.the.equity.method.and,.therefore,.did.not.recognize.its.proportion
ate.share.of.investee.losses.
b. “….only.after.its.share.of.that.net.income.equals.the.share.of.net.losses.not.recognized.durin
g.the.period.the.equity.method.was.suspended”.means.that.the.investee.has.recouped.
all.of.the.losses.that.have.been.reported..Since.the.investor.ceases.to.account.for.its.Equ
ity.Investment.using.the.equity.method.once.the.balance.reaches.zero.(assuming.that.it.
has.not.guaranteed.the.debts.of.the.investee.company),.this.generally.implies.that.the.in
vestee’s.Stockholders’.Equity.is.below.zero.(i.e.,.a.deficit)..The.investor.resumes.its.accou
nting.for.the.Equity.investment.using.the.equity.method.once.the.investee’s.Stockholde
rs’.Equity.is.positive..It.is.at.that.point.when.the.investee.company.has.recouped.all.of.its.
prior.losses.(assuming.that.the.investee.company.has.not.raised.additional.equity.capita
l).
.
5th Edition
.
byPatrick Hopkinsand Halsey
. . . .
, Advanced Accounting Fi
. .
fth Edition
.
By.Patrick.E..Hopkins.and.Robert.F..Halsey
Solution Manual.
Chapter 1— Accounting for Intercorporate Investments
. . . . . .
1. a..If.the.investor.acquired.100%.of.the.investee.at.book.value,.the.Equity.Investment.accoun
t.is.equal.to.the.Stockholders’.Equity.of.the.investee.company..It,.therefore,.includes.the
.assets.and.liabilities .of.the.investee.company.in.one.account..The.investor’s .balance.she
et,.therefore,.includes.the.Stockholders’.Equity.of.the.investee.company,.and,.implicitly,
.its.assets.and.liabilities..In.the.consolidation.process,.the.balance.sheets .of.the.investor.
and.investee.company.are.brought.together..Consolidated.Stockholders’.Equity.will.be.
the.same.as.that.which.the.investor.currently.reports;.only.total.assets.and.total.liabiliti
es.will.change.
b. If.the.investor.owns.100%.of.the.investee,.the.equity.income.that.the.investor.reports.is.e
qual.to.the.net.income.of.the.investee,.thus.implicitly.including.its.revenues.and.expens
es..Replacing.the.equity.income.with.the.revenues.and.expenses.of.the.investee.compa
ny.in.the.consolidation.process.will.yield.the.same.net.income.
2. FASB. ASC. 323-
10. provides. the. following. guidance. with. respect. to.the. accounting. for.receipt.of.dividend
s.using.the.equity.method:
The.equity.method.tends.to.be.most.appropriate.if.an.investment.enables.the.inves
tor.to.influence.the.operating.or.financial.decisions.of.the.investee..The.investor.the
n.has.a.degree.of.responsibility.for.the.return.on.its.investment,.and.it.is.appropriate.
to.include.in.the.results.of.operations.of.the.investor.its.share.of.the.earnings.or.losse
s.of.the.investee..(¶323-10-05-5)
The.equity.method.is.an.appropriate.means.of.recognizing.increases.or.decreases.measure
d.by.generally.accepted.accounting.principles.(GAAP).in.the.economic.resources.underlying.t
he.investments..Furthermore,.the.equity.method.of.accounting.more.closely.meets.the.obje
ctives.of.accrual.accounting.than.does.the.cost.method.because.the.investor.recognizes.its.
share.of.the.earnings.and.losses.of.the.investee.in.the.periods.in.which.they.are.reflected.in.t
he.accounts.of.the.investee..(¶323-10-05-4)
Under.the.equity.method,.an.investor.shall.recognize.its.share.of.the.earnings.or.losses.of.an
.investee.in.the.periods .for.which.they.are.reported.by.the.investee.in.its.financial.statement
s.rather.than.in.the.period.in.which.an.investee.declares.a.dividend.(¶323-10-.35-4).
,3. The.recognition.of.equity.income.does.not.mean.that.cash.has.been.received..In.fact,.divide
nds.paid.by.the.investee.to.the.investor.are.typically.a.small.percentage.of.its.reported.net.in
come..The.projection.of.future.net.income.that.includes.equity.income.as.a.significant.comp
onent.might.not,.therefore,.imply.significant.generation.of.cash.
4. The.accounting.for.Altria’s.investment.in.ABI.depends.on.the.degree.of.influence.or.control.i
t.can.exert.over.that.company..A.classification.of.“no.influence”.does.not.appear.appropriate
.since.Altria.owns.10.1%.of.the.outstanding.common.stock.and.also.“active.representation.o
n.ABI’s.Board.of.Directors.(“ABI.Board”).and.certain.ABI.Board.committees..Through.this.rep
resentation,.Altria.participates.in.ABI.policy.making.processes.”.A.classification.of.“significa
nt.influence”.seems.most.appropriate.given.the.facts,.and.this.classification.warrants.accou
nting.for.the.investment.using.the.equity.method.of.accounting.
5. a..An.investor.may.write.down.the.carrying.amount.of.its.Equity.Investment.if.the.fair.value.
of.that.investment.has.declined.below.its.carrying.value.and.that.decline.is.deemed.to.b
e.other.than.temporary.
b. There.is.considerable.judgment.in.determining.whether.a.decline.in.fair.value.is.other.tha
n.temporary..The.write-
down.amounts.to.a.prediction.that.the.future.fair.value.of.the.investment.will.not.rise.ab
ove.the.current.carrying.amount..If.a.company.deems.the.decline.to.be.temporary,.it.do
es.not.write.down.the.investment,.and.a.loss.is.not.recognized.in.its.income.statement..If.
the.decline.is.deemed.to.be.other.than.temporary,.the.investment.is.written.down.and.a.l
oss.is.reported..Companies.can.use.this.flexibility.to.decide.whether.to.recognize.a.loss.in.t
he.current.year.or.to.postpone.it.to.a.future.year.
6. Under.the.equity.method,.an.investor.recognizes.its.share.of.the.earnings.or.losses.of.an.inve
stee.in.the.periods.for.which.they.are.reported.by.the.investee.in.its.financial.statements..FA
SB.ASC.323-10-35-7.states.that.“Intra-
entity.profits.and.losses.shall.be.eliminated.until.realized.by.the.investor.or.investee.as.if.the.in
vestee.were.consolidated.”.These.intercompany.items.are.eliminated.to.avoid.double.counti
ng.and.prematurely.recognizing.income.
2023
1-2 Advanced.Accounting,.5th.Edition
, 7. FASB.ASC.323-10-
15.requires.the.use.of.the.equity.method.of.accounting.for.an.investor.whose.investment.in.
voting.stock.gives.it.the.ability.to.exercise.significant.influence.over.operating.and.financial.po
licies.of.an.investee..Section.15-
6.states.that.“Ability.to.exercise.significant.influence.over.operating.and.financial.policies.of.a
n.investee.may.be.indicated.in.several.ways,.including.the.following:.Representation.on.the.
board.of.directors,.Participation.in.policy-making.processes,.Material.intra-
entity.transactions,.change.of.managerial.personnel,.Technological.dependency,.and.Extent.
of.ownership.by.an.investor.in.relation.to.the.concentration.of.other.shareholdings.(but.subs
tantial.or.majority.ownership.of.the.voting.stock.of.an.investee.by.another.investor.does.not
.necessarily.preclude.the.ability.to.exercise.significant.influence.by.the.investor)”.(emphasis
.added)..It.is.clear,.in.this.case,.that.the.investee.is.critically.dependent.upon.the.technology.l
icensed.to.it.by.the.investor..The.investor.should,.therefore,.account.for.its.investment.usin
g.the.equity.method.
8. Even.though.the.investor.owns.30%.of.the.investee,.it.should.not.use.the.equity.method.as.it.
cannot.exert.significant.influence.over.the.investee..Further,.since.the.investee.is.not.a.public.
company.(all.of.the.remaining.stock.is.privately.held),.the.investor.should.use.the.cost.metho
d.to.account.for.this.investment.as.the.fair.value.method.presumes.a.publicly.traded.stock.wi
th.sufficient.liquidity.to.reasonably.determine.a.fair.value.
9. a..The.losses.did.not.affect.Enron’s.income.statement..Since.the.investees.were.insolvent,.E
nron’s.Equity.Investment.was.reduced.to.zero.(it.had.not.made.any.loans.or.other.advan
ces.to.the.investee.companies)..As.a.result,.Enron.discontinued.reporting.for.these.Equi
ty.Investments.using.the.equity.method.and,.therefore,.did.not.recognize.its.proportion
ate.share.of.investee.losses.
b. “….only.after.its.share.of.that.net.income.equals.the.share.of.net.losses.not.recognized.durin
g.the.period.the.equity.method.was.suspended”.means.that.the.investee.has.recouped.
all.of.the.losses.that.have.been.reported..Since.the.investor.ceases.to.account.for.its.Equ
ity.Investment.using.the.equity.method.once.the.balance.reaches.zero.(assuming.that.it.
has.not.guaranteed.the.debts.of.the.investee.company),.this.generally.implies.that.the.in
vestee’s.Stockholders’.Equity.is.below.zero.(i.e.,.a.deficit)..The.investor.resumes.its.accou
nting.for.the.Equity.investment.using.the.equity.method.once.the.investee’s.Stockholde
rs’.Equity.is.positive..It.is.at.that.point.when.the.investee.company.has.recouped.all.of.its.
prior.losses.(assuming.that.the.investee.company.has.not.raised.additional.equity.capita
l).
