AdvancedAccounting,
j
5th Edition
j
by Patrick Hopkins and Halsey
j j j j
, AdvancedjAccountingjFi
fthjEdition
ByjPatrickjE.jHopkinsjandjRobertjF.jHalsey
Solutionj Manual
Chapterj 1—jAccountingj forj Intercorporatej Investments
j
1. a.jIfjthejinvestorjacquiredj100%jofjthejinvesteejatjbookjvalue,jthejEquityjInvestmentjaccou
ntjisjequaljtojthejStockholders’jEquityjofjthejinvesteejcompany.jIt,jtherefore,jincludesjt
hejassetsjandjliabilitiesjofjthejinvesteejcompanyjinjonejaccount.jThejinvestor’sjbalance
jsheet,jtherefore, jincludesjthejStockholders’jEquityjofjthejinvestee jcompany,jand,jimpli
citly,jitsjassetsjandjliabilities.jInjthejconsolidationjprocess,jthejbalancejsheetsjofjthejinv
estorjandjinvesteejcompanyjarejbroughtjtogether.jConsolidatedjStockholders’jEquityj
willjbejthejsamejasjthatjwhichjthejinvestorjcurrentlyjreports;jonlyjtotaljassetsjandjtotal
jliabilitiesjwilljchange.
b. Ifjthejinvestorjownsj100%jofjthejinvestee,jthejequityjincomejthatjthejinvestorjreportsjisj
equaljtojthejnetjincomejofjthejinvestee,jthusjimplicitlyjincludingjitsjrevenuesjandjexpe
nses.jReplacingjthejequityjincomejwithjthejrevenuesjandjexpensesjofjthejinvesteejco
mpanyjinjthejconsolidationjprocessjwilljyieldjthejsamejnetjincome.
2. FASBj ASCj 323-
10j providesj thej followingj guidancej withj respectj tojthej accountingj forjreceiptjofjdividen
dsjusingjthejequityjmethod:
Thejequityjmethodjtendsjtojbejmostjappropriatejifjanjinvestmentjenablesjthejinve
storjtojinfluencejthejoperatingjorjfinancialjdecisionsjofjthejinvestee.jThejinvestorjt
henjhasjajdegreejofjresponsibilityjforjthejreturnjonjitsjinvestment,jandjitjisjappropr
iatejtojincludejinjthejresultsjofjoperationsjofjthejinvestorjitsjsharejofjthejearningsjor
jlossesjofjthejinvestee.j(¶323-10-05-5)
Thejequityjmethodjisjanjappropriatejmeansjofjrecognizingjincreasesjorjdecreasesjmeasur
edjbyjgenerallyjacceptedjaccountingjprinciplesj(GAAP)jinjthejeconomicjresourcesjunderlyin
gjthejinvestments.jFurthermore,jthejequityjmethodjofjaccountingjmorejcloselyjmeetsjthejo
bjectivesjofjaccrualjaccountingjthanjdoesjthejcostjmethodjbecausejthejinvestorjrecognize
sjitsjsharejofjthejearningsjandjlossesjofjthejinvesteejinjthejperiodsjinjwhichjtheyjarejreflect
edjinjthejaccountsjofjthejinvestee.j(¶323-10-05-4)
Underjthejequityjmethod,janjinvestorjshalljrecognizejitsjsharejofjthejearningsjorjlossesjofj
anjinvesteejinjthejperiodsjforjwhichjtheyjarejreportedjbyjthejinvesteejinjitsjfinancialjstate
mentsjratherjthanjinjthejperiodjinjwhichjanjinvesteejdeclaresjajdividendj(¶323-10-j35-4).
,3. Thejrecognitionjofjequityjincomejdoesjnotjmeanjthatjcashjhasjbeenjreceived.jInjfact,jdivid
endsjpaidjbyjthejinvesteejtojthejinvestorjarejtypicallyjajsmalljpercentagejofjitsjreportedjne
tjincome.jThejprojectionjofjfuturejnetjincomejthatjincludesjequityjincomejasjajsignificantjco
mponentjmightjnot,jtherefore,jimplyjsignificantjgenerationjofjcash.
4. ThejaccountingjforjAltria’sjinvestmentjinjABIjdependsjonjthejdegreejofjinfluencejorjcontro
ljitjcanjexertjoverjthatjcompany.jAjclassificationjofj“nojinfluence”jdoesjnotjappearjappropri
atejsincejAltriajownsj10.1%jofjthejoutstandingjcommonjstockjandjalsoj“activejrepresentat
ionjonjABI’sjBoardjofjDirectorsj(“ABIjBoard”)jandjcertainjABIjBoardjcommittees.jThroughjt
hisjrepresentation,jAltriajparticipatesjinjABIjpolicyjmakingjprocesses.”jAjclassificationjofj“s
ignificantjinfluence”jseemsjmostjappropriatejgivenjthejfacts,jandjthisjclassificationjwarran
tsjaccountingjforjthejinvestmentjusingjthejequityjmethodjofjaccounting.
5. a.jAnjinvestorjmayjwritejdownjthejcarryingjamountjofjitsjEquityjInvestmentjifjthejfairjvalu
ejofjthatjinvestmentjhasjdeclinedjbelowjitsjcarryingjvaluejandjthatjdeclinejisjdeemedjt
ojbejotherjthanjtemporary.
b. Therejisjconsiderablejjudgmentjinjdeterminingjwhetherjajdeclinejinjfairjvaluejisjotherjth
anjtemporary.jThejwrite-
downjamountsjtojajpredictionjthatjthejfuturejfairjvaluejofjthejinvestmentjwilljnotjriseja
bovejthejcurrentjcarryingjamount.jIfjajcompanyjdeemsjthejdeclinejtojbejtemporary,jitj
doesjnotjwritejdownjthejinvestment,jandjajlossjisjnotjrecognizedjinjitsjincomejstateme
nt.jIfjthejdeclinejisjdeemedjtojbejotherjthanjtemporary,jthejinvestmentjisjwrittenjdownj
andjajlossjisjreported.jCompaniesjcanjusejthisjflexibilityjtojdecidejwhetherjtojrecognizej
ajlossjinjthejcurrentjyearjorjtojpostponejitjtojajfuturejyear.
6. Underjthejequityjmethod,janjinvestorjrecognizesjitsjsharejofjthejearningsjorjlossesjofjanjinv
esteejinjthejperiodsjforjwhichjtheyjarejreportedjbyjthejinvesteejinjitsjfinancialjstatements.j
FASBjASCj323-10-35-7jstatesjthatj“Intra-
entityjprofitsjandjlossesjshalljbejeliminatedjuntiljrealizedjbyjthejinvestorjorjinvesteejasjifjtheji
nvesteejwerejconsolidated.”jThesejintercompanyjitemsjarejeliminatedjtojavoidjdoublejcou
ntingjandjprematurelyjrecognizingjincome.
2023
1-2 Advancedj Accounting,j5thjEdition
, 7. FASBjASCj323-10-
15jrequiresjthejusejofjthejequityjmethodjofjaccountingjforjanjinvestorjwhosejinvestmentji
njvotingjstockjgivesjitjthejabilityjtojexercisejsignificantjinfluencejoverjoperatingjandjfinancial
jpoliciesjofjanjinvestee.jSectionj15-
6jstatesjthatj“Abilityjtojexercisejsignificantjinfluencejoverjoperatingjandjfinancialjpoliciesjofj
anjinvesteejmayjbejindicatedjinjseveraljways,jincludingjthejfollowing:jRepresentationjonjth
ejboardjofjdirectors,jParticipationjinjpolicy-makingjprocesses,jMaterialjintra-
entityjtransactions,jchangejofjmanagerialjpersonnel,jTechnologicaljdependency,jandjExtent
jofjownershipjbyjanjinvestorjinjrelationjtojthejconcentrationjofjotherjshareholdingsj(butjsu
bstantialjorjmajorityjownershipjofjthejvotingjstockjofjanjinvesteejbyjanotherjinvestorjdoes
jnotjnecessarilyjpreclude jthejabilityjtojexercisejsignificantjinfluencejbyjthejinvestor)”j(emp
hasisjadded).jItjisjclear,jinjthisjcase,jthatjthejinvesteejisjcriticallyjdependentjuponjthejtechn
ologyjlicensedjtojitjbyjthejinvestor.jThejinvestorjshould,jtherefore,jaccountjforjitsjinvestm
entjusingjthejequityjmethod.
8. Evenjthoughjthejinvestorjownsj30%jofjthejinvestee,jitjshouldjnotjusejthejequityjmethodjasji
tjcannotjexertjsignificantjinfluencejoverjthejinvestee.jFurther,jsincejthejinvesteejisjnotjajpub
licjcompanyj(alljofjthejremainingjstockjisjprivatelyjheld),jthejinvestorjshouldjusejthejcostjme
thodjtojaccountjforjthisjinvestmentjasjthejfairjvaluejmethodjpresumesjajpubliclyjtradedjsto
ckjwithjsufficientjliquidityjtojreasonablyjdeterminejajfairjvalue.
9. a.jThejlossesjdidjnotjaffectjEnron’sjincomejstatement.jSincejthejinvesteesjwerejinsolvent,j
Enron’sjEquityjInvestmentjwasjreducedjtojzeroj(itjhadjnotjmadejanyjloansjorjotherjadv
ancesjtojthejinvesteejcompanies).jAsjajresult,jEnronjdiscontinuedjreportingjforjthesejE
quityjInvestmentsjusingjthejequityjmethodjand,jtherefore,jdidjnotjrecognizejitsjpropo
rtionatejsharejofjinvesteejlosses.
b. “…jonlyjafterjitsjsharejofjthatjnetjincomejequalsjthejsharejofjnetjlossesjnotjrecognizedjduri
ngjthejperiodjthejequityjmethodjwasjsuspended”jmeansjthatjthejinvesteejhasjrecoup
edjalljofjthejlossesjthatjhavejbeenjreported.jSincejthejinvestorjceasesjtojaccountjforjitsj
EquityjInvestmentjusingjthejequityjmethodjoncejthejbalancejreachesjzeroj(assumingjt
hatjitjhasjnotjguaranteedjthejdebtsjofjthejinvesteejcompany),jthisjgenerallyjimpliesjtha
tjthejinvestee’sjStockholders’jEquityjisjbelowjzeroj(i.e.,jajdeficit).jThejinvestorjresumesji
tsjaccountingjforjthejEquityjinvestmentjusingjthejequityjmethodjoncejthejinvestee’sjSt
ockholders’jEquityjisjpositive.jItjisjatjthatjpointjwhenjthejinvesteejcompanyjhasjrecoup
edjalljofjitsjpriorjlossesj(assumingjthatjthejinvesteejcompanyjhasjnotjraisedjadditionalje
quityjcapital).
j
5th Edition
j
by Patrick Hopkins and Halsey
j j j j
, AdvancedjAccountingjFi
fthjEdition
ByjPatrickjE.jHopkinsjandjRobertjF.jHalsey
Solutionj Manual
Chapterj 1—jAccountingj forj Intercorporatej Investments
j
1. a.jIfjthejinvestorjacquiredj100%jofjthejinvesteejatjbookjvalue,jthejEquityjInvestmentjaccou
ntjisjequaljtojthejStockholders’jEquityjofjthejinvesteejcompany.jIt,jtherefore,jincludesjt
hejassetsjandjliabilitiesjofjthejinvesteejcompanyjinjonejaccount.jThejinvestor’sjbalance
jsheet,jtherefore, jincludesjthejStockholders’jEquityjofjthejinvestee jcompany,jand,jimpli
citly,jitsjassetsjandjliabilities.jInjthejconsolidationjprocess,jthejbalancejsheetsjofjthejinv
estorjandjinvesteejcompanyjarejbroughtjtogether.jConsolidatedjStockholders’jEquityj
willjbejthejsamejasjthatjwhichjthejinvestorjcurrentlyjreports;jonlyjtotaljassetsjandjtotal
jliabilitiesjwilljchange.
b. Ifjthejinvestorjownsj100%jofjthejinvestee,jthejequityjincomejthatjthejinvestorjreportsjisj
equaljtojthejnetjincomejofjthejinvestee,jthusjimplicitlyjincludingjitsjrevenuesjandjexpe
nses.jReplacingjthejequityjincomejwithjthejrevenuesjandjexpensesjofjthejinvesteejco
mpanyjinjthejconsolidationjprocessjwilljyieldjthejsamejnetjincome.
2. FASBj ASCj 323-
10j providesj thej followingj guidancej withj respectj tojthej accountingj forjreceiptjofjdividen
dsjusingjthejequityjmethod:
Thejequityjmethodjtendsjtojbejmostjappropriatejifjanjinvestmentjenablesjthejinve
storjtojinfluencejthejoperatingjorjfinancialjdecisionsjofjthejinvestee.jThejinvestorjt
henjhasjajdegreejofjresponsibilityjforjthejreturnjonjitsjinvestment,jandjitjisjappropr
iatejtojincludejinjthejresultsjofjoperationsjofjthejinvestorjitsjsharejofjthejearningsjor
jlossesjofjthejinvestee.j(¶323-10-05-5)
Thejequityjmethodjisjanjappropriatejmeansjofjrecognizingjincreasesjorjdecreasesjmeasur
edjbyjgenerallyjacceptedjaccountingjprinciplesj(GAAP)jinjthejeconomicjresourcesjunderlyin
gjthejinvestments.jFurthermore,jthejequityjmethodjofjaccountingjmorejcloselyjmeetsjthejo
bjectivesjofjaccrualjaccountingjthanjdoesjthejcostjmethodjbecausejthejinvestorjrecognize
sjitsjsharejofjthejearningsjandjlossesjofjthejinvesteejinjthejperiodsjinjwhichjtheyjarejreflect
edjinjthejaccountsjofjthejinvestee.j(¶323-10-05-4)
Underjthejequityjmethod,janjinvestorjshalljrecognizejitsjsharejofjthejearningsjorjlossesjofj
anjinvesteejinjthejperiodsjforjwhichjtheyjarejreportedjbyjthejinvesteejinjitsjfinancialjstate
mentsjratherjthanjinjthejperiodjinjwhichjanjinvesteejdeclaresjajdividendj(¶323-10-j35-4).
,3. Thejrecognitionjofjequityjincomejdoesjnotjmeanjthatjcashjhasjbeenjreceived.jInjfact,jdivid
endsjpaidjbyjthejinvesteejtojthejinvestorjarejtypicallyjajsmalljpercentagejofjitsjreportedjne
tjincome.jThejprojectionjofjfuturejnetjincomejthatjincludesjequityjincomejasjajsignificantjco
mponentjmightjnot,jtherefore,jimplyjsignificantjgenerationjofjcash.
4. ThejaccountingjforjAltria’sjinvestmentjinjABIjdependsjonjthejdegreejofjinfluencejorjcontro
ljitjcanjexertjoverjthatjcompany.jAjclassificationjofj“nojinfluence”jdoesjnotjappearjappropri
atejsincejAltriajownsj10.1%jofjthejoutstandingjcommonjstockjandjalsoj“activejrepresentat
ionjonjABI’sjBoardjofjDirectorsj(“ABIjBoard”)jandjcertainjABIjBoardjcommittees.jThroughjt
hisjrepresentation,jAltriajparticipatesjinjABIjpolicyjmakingjprocesses.”jAjclassificationjofj“s
ignificantjinfluence”jseemsjmostjappropriatejgivenjthejfacts,jandjthisjclassificationjwarran
tsjaccountingjforjthejinvestmentjusingjthejequityjmethodjofjaccounting.
5. a.jAnjinvestorjmayjwritejdownjthejcarryingjamountjofjitsjEquityjInvestmentjifjthejfairjvalu
ejofjthatjinvestmentjhasjdeclinedjbelowjitsjcarryingjvaluejandjthatjdeclinejisjdeemedjt
ojbejotherjthanjtemporary.
b. Therejisjconsiderablejjudgmentjinjdeterminingjwhetherjajdeclinejinjfairjvaluejisjotherjth
anjtemporary.jThejwrite-
downjamountsjtojajpredictionjthatjthejfuturejfairjvaluejofjthejinvestmentjwilljnotjriseja
bovejthejcurrentjcarryingjamount.jIfjajcompanyjdeemsjthejdeclinejtojbejtemporary,jitj
doesjnotjwritejdownjthejinvestment,jandjajlossjisjnotjrecognizedjinjitsjincomejstateme
nt.jIfjthejdeclinejisjdeemedjtojbejotherjthanjtemporary,jthejinvestmentjisjwrittenjdownj
andjajlossjisjreported.jCompaniesjcanjusejthisjflexibilityjtojdecidejwhetherjtojrecognizej
ajlossjinjthejcurrentjyearjorjtojpostponejitjtojajfuturejyear.
6. Underjthejequityjmethod,janjinvestorjrecognizesjitsjsharejofjthejearningsjorjlossesjofjanjinv
esteejinjthejperiodsjforjwhichjtheyjarejreportedjbyjthejinvesteejinjitsjfinancialjstatements.j
FASBjASCj323-10-35-7jstatesjthatj“Intra-
entityjprofitsjandjlossesjshalljbejeliminatedjuntiljrealizedjbyjthejinvestorjorjinvesteejasjifjtheji
nvesteejwerejconsolidated.”jThesejintercompanyjitemsjarejeliminatedjtojavoidjdoublejcou
ntingjandjprematurelyjrecognizingjincome.
2023
1-2 Advancedj Accounting,j5thjEdition
, 7. FASBjASCj323-10-
15jrequiresjthejusejofjthejequityjmethodjofjaccountingjforjanjinvestorjwhosejinvestmentji
njvotingjstockjgivesjitjthejabilityjtojexercisejsignificantjinfluencejoverjoperatingjandjfinancial
jpoliciesjofjanjinvestee.jSectionj15-
6jstatesjthatj“Abilityjtojexercisejsignificantjinfluencejoverjoperatingjandjfinancialjpoliciesjofj
anjinvesteejmayjbejindicatedjinjseveraljways,jincludingjthejfollowing:jRepresentationjonjth
ejboardjofjdirectors,jParticipationjinjpolicy-makingjprocesses,jMaterialjintra-
entityjtransactions,jchangejofjmanagerialjpersonnel,jTechnologicaljdependency,jandjExtent
jofjownershipjbyjanjinvestorjinjrelationjtojthejconcentrationjofjotherjshareholdingsj(butjsu
bstantialjorjmajorityjownershipjofjthejvotingjstockjofjanjinvesteejbyjanotherjinvestorjdoes
jnotjnecessarilyjpreclude jthejabilityjtojexercisejsignificantjinfluencejbyjthejinvestor)”j(emp
hasisjadded).jItjisjclear,jinjthisjcase,jthatjthejinvesteejisjcriticallyjdependentjuponjthejtechn
ologyjlicensedjtojitjbyjthejinvestor.jThejinvestorjshould,jtherefore,jaccountjforjitsjinvestm
entjusingjthejequityjmethod.
8. Evenjthoughjthejinvestorjownsj30%jofjthejinvestee,jitjshouldjnotjusejthejequityjmethodjasji
tjcannotjexertjsignificantjinfluencejoverjthejinvestee.jFurther,jsincejthejinvesteejisjnotjajpub
licjcompanyj(alljofjthejremainingjstockjisjprivatelyjheld),jthejinvestorjshouldjusejthejcostjme
thodjtojaccountjforjthisjinvestmentjasjthejfairjvaluejmethodjpresumesjajpubliclyjtradedjsto
ckjwithjsufficientjliquidityjtojreasonablyjdeterminejajfairjvalue.
9. a.jThejlossesjdidjnotjaffectjEnron’sjincomejstatement.jSincejthejinvesteesjwerejinsolvent,j
Enron’sjEquityjInvestmentjwasjreducedjtojzeroj(itjhadjnotjmadejanyjloansjorjotherjadv
ancesjtojthejinvesteejcompanies).jAsjajresult,jEnronjdiscontinuedjreportingjforjthesejE
quityjInvestmentsjusingjthejequityjmethodjand,jtherefore,jdidjnotjrecognizejitsjpropo
rtionatejsharejofjinvesteejlosses.
b. “…jonlyjafterjitsjsharejofjthatjnetjincomejequalsjthejsharejofjnetjlossesjnotjrecognizedjduri
ngjthejperiodjthejequityjmethodjwasjsuspended”jmeansjthatjthejinvesteejhasjrecoup
edjalljofjthejlossesjthatjhavejbeenjreported.jSincejthejinvestorjceasesjtojaccountjforjitsj
EquityjInvestmentjusingjthejequityjmethodjoncejthejbalancejreachesjzeroj(assumingjt
hatjitjhasjnotjguaranteedjthejdebtsjofjthejinvesteejcompany),jthisjgenerallyjimpliesjtha
tjthejinvestee’sjStockholders’jEquityjisjbelowjzeroj(i.e.,jajdeficit).jThejinvestorjresumesji
tsjaccountingjforjthejEquityjinvestmentjusingjthejequityjmethodjoncejthejinvestee’sjSt
ockholders’jEquityjisjpositive.jItjisjatjthatjpointjwhenjthejinvesteejcompanyjhasjrecoup
edjalljofjitsjpriorjlossesj(assumingjthatjthejinvesteejcompanyjhasjnotjraisedjadditionalje
quityjcapital).
