ACCESS Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle
z z z z z z z z z z
Chapterz01z-zThezEquityzMethodzofzAccountingzforzInvestmentsz–
zHoyle,zSchaefer,zDoupnik,zFundamentals zofzAdvancedzAccounting, z9/e
CHAPTER 1 T z z
HE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
z z z z z z
ChapterzOutline
I. Fourzmethodszarezprincipallyzusedztozaccountzforzanzinvestmentzinzequityzsecuritieszalongz
withzazfairzvaluezoption.
A. Fairzvaluezmethod:zappliedzbyzanzinvestorzwhenzonlyzazsmallzpercentagezofzazc
ompany’szvotingzstockziszheld.
1. Thezinvestorzrecognizeszincomezwhenzthezinvesteezdeclareszazdividend.
2. Portfolioszarezreportedzatzfairzvalue.zIfzfairzvalueszarezunavailable,zinvestmentziszr
eportedzatzcost.
B. CostzMethod:zappliedztozinvestmentszwithoutzazreadilyzdeterminablezfairzvalue.zWhenzt
hezfairzvaluezofzanzinvestmentzinzequityzsecuritieszisznotzreadilyzdeterminable,zandzthezin
vestmentzprovideszneitherzsignificantzinfluenceznorzcontrol,zthezinvestmentzmayzbezme
asuredzatzcost.zThezinvestmentzremainszatzcostzunless
1. Azdemonstrablezimpairmentzoccurszforzthezinvestment,zor
2. Anzobservablezpricezchangezoccurszforzidenticalzorzsimilarzinvestmentszofzthezsamezi
ssuer.
Thezinvestorztypicallyzrecognizeszitszsharezofzinvesteezdividendszdeclaredzaszdividendzincom
e.
C. Consolidation:zwhenzonezfirmzcontrolszanotherz(e.g.,zwhenzazparentzhaszazmajorityzint
erestzinzthezvotingzstockzofzazsubsidiaryzorzcontrolzthroughzvariablezinterests,ztheirzfina
ncialzstatementszarezconsolidatedzandzreportedzforzthezcombinedzentity.
D. Equityzmethod:zappliedzwhenzthezinvestorzhaszthezabilityztozexercisezsignificantzi
nfluencezoverzoperatingzandzfinancialzpolicieszofzthezinvestee.
1. Abilityztozsignificantlyzinfluencezinvesteeziszindicatedzbyzseveralzfactorszincludingzr
epresentationzonzthezboardzofzdirectors,zparticipationzinzpolicy-making,zetc.
2. GAAPzguidelineszpresumezthezequityzmethodziszapplicablezifz20ztoz50zpercentzofzthezo
utstandingzvotingzstockzofzthezinvesteeziszheldzbyzthezinvestor.
Currentzfinancialzreportingzstandardszallowzfirmsztozelectztozusezfairzvaluezforzanyznewzinvest
mentzinzequityzshareszincludingzthosezwherezthezequityzmethodzwouldzotherwisezapply.zHow
ever,zthezoption,zonceztaken,ziszirrevocable.zThezinvestorzrecognizeszbothzinvesteezdividend
szandzchangeszinzfairzvaluezoverztimezaszincome.
1-1
©zMcGrawzHillzLLC.zAllzrightszreserved.zNozreproductionzorzdistributionzwithoutzthezpriorzwrittenzconsentzofzMcGrawzHillzLLC.
mynursytest.store
,ACCESS Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle
z z z z z z z z z z
Chapterz01z-zThezEquityzMethodzofzAccountingzforzInvestmentsz–
zHoyle,zSchaefer,zDoupnik,zFundamentals zofzAdvancedzAccounting, z9/e
II. Accountingzforzanzinvestment:zthezequityzmethod
A. Thezinvestorzadjustszthezinvestmentzaccountztozreflectzallzchangeszinzthezequityzofzthezi
nvesteezcompany.
B. Thezinvestorzaccrueszinvesteezincomezwhenzitziszreportedzinzthezinvestee’szfinancialzs
tatements.
C. DividendszdeclaredzbyzthezinvesteezcreatezazreductionzinzthezcarryingzamountzofzthezIn
vestmentzaccount.zThiszbookzassumeszallzinvesteezdividendszarezdeclaredzandzpaidzinzt
hezsamezreportingzperiod.
III. Specialzaccountingzprocedureszusedzinzthezapplicationzofzthezequityzmethod
A. Reportingzazchangeztozthezequityzmethodzwhenzthezabilityztozsignificantlyzinfluencezanzi
nvesteeziszachievedzthroughzazserieszofzacquisitions.
1. Initialzpurchase(s)zwillzbezaccountedzforzbyzmeanszofzthezfairzvaluezmethodz(orzatzc
ost)zuntilzthezabilityztozsignificantlyzinfluenceziszattained.
2. Whenzthezabilityztozexercisezsignificantzinfluencezoccurszfollowingzazserieszofzstockzp
urchases,zthezinvestorzapplieszthezequityzmethodzprospectively.zTheztotalzfairzvaluez
atzthezdatezsignificantzinfluenceziszattainedziszcomparedztozthezinvestee’szbookzvalu
eztozdeterminezfuturezexcesszfairzvaluezamortizations.
B. Investeezincomezfromzotherzthanzcontinuingzoperations
1. Thezinvestorzrecognizeszitszsharezofzinvesteezreportedzotherzcomprehensivezi
ncomez(OCI)zthroughzthezinvestmentzaccountzandzthezinvestor’szownzOCI.
2. Incomezitemszsuchzaszdiscontinuedzoperationszthatzarezreportedzseparatelyzbyzthezi
nvesteezshouldzbezshownzinzthezsamezmannerzbyzthezinvestor.zThezmaterialityzofzth
esezotherzinvesteezincomezelementsz(aszitzaffectszthezinvestor)zcontinuesztozbezazcrit
erionzforzseparatezdisclosure.
C. Investeezlosses
1. Losseszreportedzbyzthezinvesteezcreatezcorrespondingzlosseszforzthezinvestor.
2. Azpermanentzdeclinezinzthezfairzvaluezofzanzinvestee’szstockzshouldzbezrecognizedzi
mmediatelyzbyzthezinvestorzaszanzimpairmentzloss.
3. Investeezlosseszcanzpossiblyzreducezthezcarryingzvaluezofzthezinvestmentzaccountzto
zazzerozbalance.zAtzthatzpoint,zthezequityzmethodzceasesztozbezapplicablezandzthezfair
-valuezmethodziszsubsequentlyzused.
D. Reportingzthezsalezofzanzequityzinvestment
1. Thezinvestorzapplieszthezequityzmethodzuntilzthezdisposalzdateztozestablishzazproperzb
ookzvalue.
2. Followingzthezsale,zthezequityzmethodzcontinuesztozbezappropriatezifzenoughzsharesza
rezstillzheldztozmaintainzthezinvestor’szabilityztozsignificantlyzinfluencezthezinvestee.zIfzt
hatzabilityzhaszbeenzlost,zthezfair-valuezmethodziszsubsequentlyzused.
IV. Excesszinvestmentzcostzoverzbookzvaluezacquired
A. Thezpricezanzinvestorzpayszforzequityzsecuritieszoftenzdifferszsignificantlyzfromzthezi
nvestee’szunderlyingzbookzvaluezprimarilyzbecausezthezhistoricalzcostzbasedzacco
untingzmodelzdoesznotzkeepztrackzofzchangeszinzazfirm’szfairzvalue.
B. Paymentszmadezinzexcesszofzunderlyingzbookzvaluezcanzsometimeszbezidentifiedzwithzs
pecificzinvesteezaccountszsuchzaszinventoryzorzequipment.
C. Anzextrazacquisitionzpricezcanzalsozbezassignedztozanticipatedzbenefitszthatzarezexpect
edztozbezderivedzfromzthezinvestment.zInzaccounting,zthesezamountszarezpresumedztozr
eflectzanzintangiblezassetzreferredztozaszgoodwill.zGoodwillziszcalculated
1-2
©zMcGrawzHillzLLC.zAllzrightszreserved.zNozreproductionzorzdistributionzwithoutzthezpriorzwrittenzconsentzofzMcGrawzHillzLLC.
mynursytest.store
,ACCESS Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle
z z z z z z z z z z
Chapterz01z-zThezEquityzMethodzofzAccountingzforzInvestmentsz–
zHoyle,zSchaefer,zDoupnik,zFundamentals zofzAdvancedzAccounting, z9/e
aszanyzexcesszpaymentzthatzisznotzattributableztozspecificzidentifiablezassetszandzliabilitie
szofzthezinvestee.zBecausezgoodwillziszanzindefinite-livedzasset,zitzisznotzamortized.
V. Deferralzofzintra-entityzgrosszprofitzinzinventory
A. Thezinvestor’szsharezofzintra-
entityzprofitszinzendingzinventoryzareznotzrecognizedzuntilztheztransferredzgoodszarezeithe
rzconsumedzorzuntilztheyzarezresoldztozunrelatedzparties.
B. Downstreamzsaleszofzinventory
1. “Downstream”zrefersztoztransferszmadezbyzthezinvestorztozthezinvestee.
2. Intra-
entityzgrosszprofitszfromzsaleszarezinitiallyzdeferredzunderzthezequityzmethodzandzth
enzrecognizedzaszincomezatztheztimezofzthezinventory’szeventualzdisposal.
3. Thezamountzofzgrosszprofitztozbezdeferredziszthezinvestor’szownershipzpercentagez
multipliedzbyzthezmarkupzonzthezmerchandisezremainingzatzthezendzofzthezyear.
C. Upstreamzsaleszofzinventory
1. “Upstream”zrefersztoztransferszmadezbyzthezinvesteeztozthezinvestor.
2. Underzthezequityzmethod,zthezdeferralzprocesszforzintra-
entityzgrosszprofitsziszidenticalzforzupstreamzandzdownstreamztransfers.zThezproced
ureszarezseparatelyzidentifiedzinzChapterzOnezbecausezthezhandlingzdoeszvaryzwithi
nzthezconsolidationzprocess.
AnswersztozDiscussionzQuestions
Theztextbookzincludeszdiscussionzquestionsztozstimulatezstudentzthoughtzandzdiscussion.zThesezqu
estionszarezalsozdesignedztozallowzstudentsztozconsiderzrelevantzissueszthatzmightzotherwisezbezover
looked.zSomezofzthesezquestionszmayzbezaddressedzbyzthezinstructorzinzclassztozmotivatezstudentzdi
scussion.zStudentszshouldzbezencouragedztozbeginzbyzdefiningzthezissue(s)zinzeachzcase.zNext,zaut
horitativezaccountingzliteraturez(FASBzASC)zorzotherzrelevantzliteraturezcanzbezconsultedzaszazpreli
minaryzstepzinzarrivingzatzlogicalzactions.zFrequently,zthezFASBzAccountingzStandardszCodificationz
willzprovideztheznecessaryzsupport.
Unfortunately,zinzaccounting,zdefinitivezresolutionsztozfinancialzreportingzquestionszareznotzalwaysza
vailable.zStudentszoftenzseemztozbelievezthatzallzaccountingzissueszhavezbeenzresolvedzinzthezpastzs
ozthatzaccountingzeducationziszonlyzazmatterzofzlearningztozapplyzhistoricallyzprescribedzprocedures.z
However,zinzactualzpractice,zthezonlyzrealzanswerziszoftenzthezonezthatzprovideszthezfairestzrepresent
ationzofzthezfirm’sztransactions.zIfzanzauthoritativezsolutionzisznotzavailable,zstudentszshouldzbezdirect
edztozlistzallzofzthezissueszinvolvedzandzthezconsequenceszofzpossiblezalternativezactions.zThezvariou
szfactorszpresentedzcanzbezweighedztozproducezazviablezsolution.
Thezdiscussionzquestionszarezdesignedztozhelpzstudentszdevelopzresearchzandzcriticalzthinkingzskills
zinzaddressingzissueszthatzgozbeyondzthezpurelyzmechanicalzelementszofzaccounting.
DidzthezCostzMethodzInvitezManipulation?
Thezcostzmethodzofzaccountingzforzinvestmentszoftenzcausedzazlackzofzobjectivityzinzreportedzincom
ezfigures.zWithzazlargezblockzofzthezinvestee’szvotingzshares,zanzinvestorzcouldzinfluencezthezamountz
andztimingzofzthezinvestee’szdividendzdeclarations.zThus,zwhenzenjoyingzazgoodzearningszyear,zanzi
nvestorzmightzinfluencezthezinvesteeztozwithholdzdeclaringzazdividendzuntilzneededzinzazsubsequentz
year.zAlternatively,zifzthezinvestorzjudgedzthatzitszcurrentzyearzearningsz“neededzazboost,”zitzmightzinfl
uencezthezinvesteeztozdeclarezazcurrentzyearzdividend.zThezequityzmethodzeffectivelyzremoveszman
agers’zabilityztozincreasezcurrentzincomez(orzdeferzincomeztozfuturezperiods)zthroughztheirzinfluencez
overztheztimingzandzamountszofzinvesteezdividendzdeclarations.
1-3
©zMcGrawzHillzLLC.zAllzrightszreserved.zNozreproductionzorzdistributionzwithoutzthezpriorzwrittenzconsentzofzMcGrawzHillzLLC.
mynursytest.store
, ACCESS Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle
z z z z z z z z z z
Chapterz01z-zThezEquityzMethodzofzAccountingzforzInvestmentsz–
zHoyle,zSchaefer,zDoupnik,zFundamentals zofzAdvancedzAccounting, z9/e
Atzfirstzglancezitzmayzseemzthatzthezfairzvaluezmethodzallowszmanagersztozmanipulatezincomezbecau
sezinvesteezdividendszarezrecordedzaszincomezbyzthezinvestor.zHowever,zdividendszpaidztypicallyzar
ezaccompaniedzbyzazdecreasezinzfairzvaluez(alsozrecognizedzinzincome),zthuszleavingzreportedznetzin
comezunaffected.
DoeszthezEquityzMethodzReallyzApplyzHere?
Thezdiscussionzinzthezcasezbetweenztheztwozaccountantsziszlimitedztozthezreasonzforzthezinvestmentz
acquisitionzandzthezcurrentzpercentagezofzownership.zInstead,ztheyzshouldzbezexaminingzthezactualzi
nteractionzthatzcurrentlyzexistszbetweenztheztwozcompanies.zAlthoughzthezabilityztozexercisezsignific
antzinfluencezoverzoperatingzandzfinancialzpolicieszappearsztozbezazratherzvaguezcriterion,zASCz323z"
Investments—
EquityzMethodzandzJointzVentures,"zclearlyzspecifieszactualzeventszthatzindicatezthiszlevelzofzauthorit
yz(paragraphz323-10-15-6):
Abilityztozexercisezthatzinfluencezmayzbezindicatedzinzseveralzways,zsuchzaszrepresentationzonzthezbo
ardzofzdirectors,zparticipationzinzpolicy-makingzprocesses,zmaterialzintra-
entityztransactions,zinterchangezofzmanagerialzpersonnel,zorztechnologicalzdependency.zAnotherzim
portantzconsiderationziszthezextentzofzownershipzbyzanzinvestorzinzrelationztozthezconcentrationzofzot
herzshareholdings,zbutzsubstantialzorzmajorityzownershipzofzthezvotingzstockzofzanzinvesteezcompan
yzbyzanotherzinvestorzdoesznotznecessarilyzprecludezthezabilityztozexercisezsignificantzinfluencezbyzth
ezinvestor.
Inzthiszcase,zthezaccountantszwouldzbezwiseztozdeterminezwhetherzDenniszBostitchzorzanyzotherzme
mberzofzthezHighlandzLaboratorieszadministrationziszparticipatingzinzthezmanagementzofzAbraham,zI
nc.zIfzanyzindividualzfromzHighland'szorganizationziszonzAbraham’szboardzofzdirectorszorziszparticipati
ngzinzmanagementzdecisions,zthezequityzmethodzwouldzseemztozbezappropriate.
Likewise,zifzsignificantztransactionszhavezoccurredzbetweenzthezcompaniesz(suchzaszloanszbyzHighla
ndztozAbraham),zthezabilityztozapplyzsignificantzinfluencezbecomeszmuchzmorezevident.
However,zifzJameszAbrahamzcontinuesztozoperatezAbraham,zInc.,zwithzlittlezorznozregardzforzHighlan
d,zthezequityzmethodzshouldznotzbezapplied.zThiszpossibilityzseemszespeciallyzlikelyzinzthiszcasezsinc
ezonezstockholder,zJameszAbraham,zcontinuesztozholdzazmajorityz(2/3)zofzthezvotingzstock.zThus,zevi
dencezofzthezabilityztozapplyzsignificantzinfluencezmustzbezpresentzbeforezthezequityzmethodziszviewe
dzaszapplicable.zThezmerezholdingzofz1/3zofzthezstockzisznotzconclusive.
1-4
©zMcGrawzHillzLLC.zAllzrightszreserved.zNozreproductionzorzdistributionzwithoutzthezpriorzwrittenzconsentzofzMcGrawzHillzLLC.
mynursytest.store
z z z z z z z z z z
Chapterz01z-zThezEquityzMethodzofzAccountingzforzInvestmentsz–
zHoyle,zSchaefer,zDoupnik,zFundamentals zofzAdvancedzAccounting, z9/e
CHAPTER 1 T z z
HE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
z z z z z z
ChapterzOutline
I. Fourzmethodszarezprincipallyzusedztozaccountzforzanzinvestmentzinzequityzsecuritieszalongz
withzazfairzvaluezoption.
A. Fairzvaluezmethod:zappliedzbyzanzinvestorzwhenzonlyzazsmallzpercentagezofzazc
ompany’szvotingzstockziszheld.
1. Thezinvestorzrecognizeszincomezwhenzthezinvesteezdeclareszazdividend.
2. Portfolioszarezreportedzatzfairzvalue.zIfzfairzvalueszarezunavailable,zinvestmentziszr
eportedzatzcost.
B. CostzMethod:zappliedztozinvestmentszwithoutzazreadilyzdeterminablezfairzvalue.zWhenzt
hezfairzvaluezofzanzinvestmentzinzequityzsecuritieszisznotzreadilyzdeterminable,zandzthezin
vestmentzprovideszneitherzsignificantzinfluenceznorzcontrol,zthezinvestmentzmayzbezme
asuredzatzcost.zThezinvestmentzremainszatzcostzunless
1. Azdemonstrablezimpairmentzoccurszforzthezinvestment,zor
2. Anzobservablezpricezchangezoccurszforzidenticalzorzsimilarzinvestmentszofzthezsamezi
ssuer.
Thezinvestorztypicallyzrecognizeszitszsharezofzinvesteezdividendszdeclaredzaszdividendzincom
e.
C. Consolidation:zwhenzonezfirmzcontrolszanotherz(e.g.,zwhenzazparentzhaszazmajorityzint
erestzinzthezvotingzstockzofzazsubsidiaryzorzcontrolzthroughzvariablezinterests,ztheirzfina
ncialzstatementszarezconsolidatedzandzreportedzforzthezcombinedzentity.
D. Equityzmethod:zappliedzwhenzthezinvestorzhaszthezabilityztozexercisezsignificantzi
nfluencezoverzoperatingzandzfinancialzpolicieszofzthezinvestee.
1. Abilityztozsignificantlyzinfluencezinvesteeziszindicatedzbyzseveralzfactorszincludingzr
epresentationzonzthezboardzofzdirectors,zparticipationzinzpolicy-making,zetc.
2. GAAPzguidelineszpresumezthezequityzmethodziszapplicablezifz20ztoz50zpercentzofzthezo
utstandingzvotingzstockzofzthezinvesteeziszheldzbyzthezinvestor.
Currentzfinancialzreportingzstandardszallowzfirmsztozelectztozusezfairzvaluezforzanyznewzinvest
mentzinzequityzshareszincludingzthosezwherezthezequityzmethodzwouldzotherwisezapply.zHow
ever,zthezoption,zonceztaken,ziszirrevocable.zThezinvestorzrecognizeszbothzinvesteezdividend
szandzchangeszinzfairzvaluezoverztimezaszincome.
1-1
©zMcGrawzHillzLLC.zAllzrightszreserved.zNozreproductionzorzdistributionzwithoutzthezpriorzwrittenzconsentzofzMcGrawzHillzLLC.
mynursytest.store
,ACCESS Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle
z z z z z z z z z z
Chapterz01z-zThezEquityzMethodzofzAccountingzforzInvestmentsz–
zHoyle,zSchaefer,zDoupnik,zFundamentals zofzAdvancedzAccounting, z9/e
II. Accountingzforzanzinvestment:zthezequityzmethod
A. Thezinvestorzadjustszthezinvestmentzaccountztozreflectzallzchangeszinzthezequityzofzthezi
nvesteezcompany.
B. Thezinvestorzaccrueszinvesteezincomezwhenzitziszreportedzinzthezinvestee’szfinancialzs
tatements.
C. DividendszdeclaredzbyzthezinvesteezcreatezazreductionzinzthezcarryingzamountzofzthezIn
vestmentzaccount.zThiszbookzassumeszallzinvesteezdividendszarezdeclaredzandzpaidzinzt
hezsamezreportingzperiod.
III. Specialzaccountingzprocedureszusedzinzthezapplicationzofzthezequityzmethod
A. Reportingzazchangeztozthezequityzmethodzwhenzthezabilityztozsignificantlyzinfluencezanzi
nvesteeziszachievedzthroughzazserieszofzacquisitions.
1. Initialzpurchase(s)zwillzbezaccountedzforzbyzmeanszofzthezfairzvaluezmethodz(orzatzc
ost)zuntilzthezabilityztozsignificantlyzinfluenceziszattained.
2. Whenzthezabilityztozexercisezsignificantzinfluencezoccurszfollowingzazserieszofzstockzp
urchases,zthezinvestorzapplieszthezequityzmethodzprospectively.zTheztotalzfairzvaluez
atzthezdatezsignificantzinfluenceziszattainedziszcomparedztozthezinvestee’szbookzvalu
eztozdeterminezfuturezexcesszfairzvaluezamortizations.
B. Investeezincomezfromzotherzthanzcontinuingzoperations
1. Thezinvestorzrecognizeszitszsharezofzinvesteezreportedzotherzcomprehensivezi
ncomez(OCI)zthroughzthezinvestmentzaccountzandzthezinvestor’szownzOCI.
2. Incomezitemszsuchzaszdiscontinuedzoperationszthatzarezreportedzseparatelyzbyzthezi
nvesteezshouldzbezshownzinzthezsamezmannerzbyzthezinvestor.zThezmaterialityzofzth
esezotherzinvesteezincomezelementsz(aszitzaffectszthezinvestor)zcontinuesztozbezazcrit
erionzforzseparatezdisclosure.
C. Investeezlosses
1. Losseszreportedzbyzthezinvesteezcreatezcorrespondingzlosseszforzthezinvestor.
2. Azpermanentzdeclinezinzthezfairzvaluezofzanzinvestee’szstockzshouldzbezrecognizedzi
mmediatelyzbyzthezinvestorzaszanzimpairmentzloss.
3. Investeezlosseszcanzpossiblyzreducezthezcarryingzvaluezofzthezinvestmentzaccountzto
zazzerozbalance.zAtzthatzpoint,zthezequityzmethodzceasesztozbezapplicablezandzthezfair
-valuezmethodziszsubsequentlyzused.
D. Reportingzthezsalezofzanzequityzinvestment
1. Thezinvestorzapplieszthezequityzmethodzuntilzthezdisposalzdateztozestablishzazproperzb
ookzvalue.
2. Followingzthezsale,zthezequityzmethodzcontinuesztozbezappropriatezifzenoughzsharesza
rezstillzheldztozmaintainzthezinvestor’szabilityztozsignificantlyzinfluencezthezinvestee.zIfzt
hatzabilityzhaszbeenzlost,zthezfair-valuezmethodziszsubsequentlyzused.
IV. Excesszinvestmentzcostzoverzbookzvaluezacquired
A. Thezpricezanzinvestorzpayszforzequityzsecuritieszoftenzdifferszsignificantlyzfromzthezi
nvestee’szunderlyingzbookzvaluezprimarilyzbecausezthezhistoricalzcostzbasedzacco
untingzmodelzdoesznotzkeepztrackzofzchangeszinzazfirm’szfairzvalue.
B. Paymentszmadezinzexcesszofzunderlyingzbookzvaluezcanzsometimeszbezidentifiedzwithzs
pecificzinvesteezaccountszsuchzaszinventoryzorzequipment.
C. Anzextrazacquisitionzpricezcanzalsozbezassignedztozanticipatedzbenefitszthatzarezexpect
edztozbezderivedzfromzthezinvestment.zInzaccounting,zthesezamountszarezpresumedztozr
eflectzanzintangiblezassetzreferredztozaszgoodwill.zGoodwillziszcalculated
1-2
©zMcGrawzHillzLLC.zAllzrightszreserved.zNozreproductionzorzdistributionzwithoutzthezpriorzwrittenzconsentzofzMcGrawzHillzLLC.
mynursytest.store
,ACCESS Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle
z z z z z z z z z z
Chapterz01z-zThezEquityzMethodzofzAccountingzforzInvestmentsz–
zHoyle,zSchaefer,zDoupnik,zFundamentals zofzAdvancedzAccounting, z9/e
aszanyzexcesszpaymentzthatzisznotzattributableztozspecificzidentifiablezassetszandzliabilitie
szofzthezinvestee.zBecausezgoodwillziszanzindefinite-livedzasset,zitzisznotzamortized.
V. Deferralzofzintra-entityzgrosszprofitzinzinventory
A. Thezinvestor’szsharezofzintra-
entityzprofitszinzendingzinventoryzareznotzrecognizedzuntilztheztransferredzgoodszarezeithe
rzconsumedzorzuntilztheyzarezresoldztozunrelatedzparties.
B. Downstreamzsaleszofzinventory
1. “Downstream”zrefersztoztransferszmadezbyzthezinvestorztozthezinvestee.
2. Intra-
entityzgrosszprofitszfromzsaleszarezinitiallyzdeferredzunderzthezequityzmethodzandzth
enzrecognizedzaszincomezatztheztimezofzthezinventory’szeventualzdisposal.
3. Thezamountzofzgrosszprofitztozbezdeferredziszthezinvestor’szownershipzpercentagez
multipliedzbyzthezmarkupzonzthezmerchandisezremainingzatzthezendzofzthezyear.
C. Upstreamzsaleszofzinventory
1. “Upstream”zrefersztoztransferszmadezbyzthezinvesteeztozthezinvestor.
2. Underzthezequityzmethod,zthezdeferralzprocesszforzintra-
entityzgrosszprofitsziszidenticalzforzupstreamzandzdownstreamztransfers.zThezproced
ureszarezseparatelyzidentifiedzinzChapterzOnezbecausezthezhandlingzdoeszvaryzwithi
nzthezconsolidationzprocess.
AnswersztozDiscussionzQuestions
Theztextbookzincludeszdiscussionzquestionsztozstimulatezstudentzthoughtzandzdiscussion.zThesezqu
estionszarezalsozdesignedztozallowzstudentsztozconsiderzrelevantzissueszthatzmightzotherwisezbezover
looked.zSomezofzthesezquestionszmayzbezaddressedzbyzthezinstructorzinzclassztozmotivatezstudentzdi
scussion.zStudentszshouldzbezencouragedztozbeginzbyzdefiningzthezissue(s)zinzeachzcase.zNext,zaut
horitativezaccountingzliteraturez(FASBzASC)zorzotherzrelevantzliteraturezcanzbezconsultedzaszazpreli
minaryzstepzinzarrivingzatzlogicalzactions.zFrequently,zthezFASBzAccountingzStandardszCodificationz
willzprovideztheznecessaryzsupport.
Unfortunately,zinzaccounting,zdefinitivezresolutionsztozfinancialzreportingzquestionszareznotzalwaysza
vailable.zStudentszoftenzseemztozbelievezthatzallzaccountingzissueszhavezbeenzresolvedzinzthezpastzs
ozthatzaccountingzeducationziszonlyzazmatterzofzlearningztozapplyzhistoricallyzprescribedzprocedures.z
However,zinzactualzpractice,zthezonlyzrealzanswerziszoftenzthezonezthatzprovideszthezfairestzrepresent
ationzofzthezfirm’sztransactions.zIfzanzauthoritativezsolutionzisznotzavailable,zstudentszshouldzbezdirect
edztozlistzallzofzthezissueszinvolvedzandzthezconsequenceszofzpossiblezalternativezactions.zThezvariou
szfactorszpresentedzcanzbezweighedztozproducezazviablezsolution.
Thezdiscussionzquestionszarezdesignedztozhelpzstudentszdevelopzresearchzandzcriticalzthinkingzskills
zinzaddressingzissueszthatzgozbeyondzthezpurelyzmechanicalzelementszofzaccounting.
DidzthezCostzMethodzInvitezManipulation?
Thezcostzmethodzofzaccountingzforzinvestmentszoftenzcausedzazlackzofzobjectivityzinzreportedzincom
ezfigures.zWithzazlargezblockzofzthezinvestee’szvotingzshares,zanzinvestorzcouldzinfluencezthezamountz
andztimingzofzthezinvestee’szdividendzdeclarations.zThus,zwhenzenjoyingzazgoodzearningszyear,zanzi
nvestorzmightzinfluencezthezinvesteeztozwithholdzdeclaringzazdividendzuntilzneededzinzazsubsequentz
year.zAlternatively,zifzthezinvestorzjudgedzthatzitszcurrentzyearzearningsz“neededzazboost,”zitzmightzinfl
uencezthezinvesteeztozdeclarezazcurrentzyearzdividend.zThezequityzmethodzeffectivelyzremoveszman
agers’zabilityztozincreasezcurrentzincomez(orzdeferzincomeztozfuturezperiods)zthroughztheirzinfluencez
overztheztimingzandzamountszofzinvesteezdividendzdeclarations.
1-3
©zMcGrawzHillzLLC.zAllzrightszreserved.zNozreproductionzorzdistributionzwithoutzthezpriorzwrittenzconsentzofzMcGrawzHillzLLC.
mynursytest.store
, ACCESS Test Bank for Fundamentals of Advanced Accounting 9th Edition Hoyle
z z z z z z z z z z
Chapterz01z-zThezEquityzMethodzofzAccountingzforzInvestmentsz–
zHoyle,zSchaefer,zDoupnik,zFundamentals zofzAdvancedzAccounting, z9/e
Atzfirstzglancezitzmayzseemzthatzthezfairzvaluezmethodzallowszmanagersztozmanipulatezincomezbecau
sezinvesteezdividendszarezrecordedzaszincomezbyzthezinvestor.zHowever,zdividendszpaidztypicallyzar
ezaccompaniedzbyzazdecreasezinzfairzvaluez(alsozrecognizedzinzincome),zthuszleavingzreportedznetzin
comezunaffected.
DoeszthezEquityzMethodzReallyzApplyzHere?
Thezdiscussionzinzthezcasezbetweenztheztwozaccountantsziszlimitedztozthezreasonzforzthezinvestmentz
acquisitionzandzthezcurrentzpercentagezofzownership.zInstead,ztheyzshouldzbezexaminingzthezactualzi
nteractionzthatzcurrentlyzexistszbetweenztheztwozcompanies.zAlthoughzthezabilityztozexercisezsignific
antzinfluencezoverzoperatingzandzfinancialzpolicieszappearsztozbezazratherzvaguezcriterion,zASCz323z"
Investments—
EquityzMethodzandzJointzVentures,"zclearlyzspecifieszactualzeventszthatzindicatezthiszlevelzofzauthorit
yz(paragraphz323-10-15-6):
Abilityztozexercisezthatzinfluencezmayzbezindicatedzinzseveralzways,zsuchzaszrepresentationzonzthezbo
ardzofzdirectors,zparticipationzinzpolicy-makingzprocesses,zmaterialzintra-
entityztransactions,zinterchangezofzmanagerialzpersonnel,zorztechnologicalzdependency.zAnotherzim
portantzconsiderationziszthezextentzofzownershipzbyzanzinvestorzinzrelationztozthezconcentrationzofzot
herzshareholdings,zbutzsubstantialzorzmajorityzownershipzofzthezvotingzstockzofzanzinvesteezcompan
yzbyzanotherzinvestorzdoesznotznecessarilyzprecludezthezabilityztozexercisezsignificantzinfluencezbyzth
ezinvestor.
Inzthiszcase,zthezaccountantszwouldzbezwiseztozdeterminezwhetherzDenniszBostitchzorzanyzotherzme
mberzofzthezHighlandzLaboratorieszadministrationziszparticipatingzinzthezmanagementzofzAbraham,zI
nc.zIfzanyzindividualzfromzHighland'szorganizationziszonzAbraham’szboardzofzdirectorszorziszparticipati
ngzinzmanagementzdecisions,zthezequityzmethodzwouldzseemztozbezappropriate.
Likewise,zifzsignificantztransactionszhavezoccurredzbetweenzthezcompaniesz(suchzaszloanszbyzHighla
ndztozAbraham),zthezabilityztozapplyzsignificantzinfluencezbecomeszmuchzmorezevident.
However,zifzJameszAbrahamzcontinuesztozoperatezAbraham,zInc.,zwithzlittlezorznozregardzforzHighlan
d,zthezequityzmethodzshouldznotzbezapplied.zThiszpossibilityzseemszespeciallyzlikelyzinzthiszcasezsinc
ezonezstockholder,zJameszAbraham,zcontinuesztozholdzazmajorityz(2/3)zofzthezvotingzstock.zThus,zevi
dencezofzthezabilityztozapplyzsignificantzinfluencezmustzbezpresentzbeforezthezequityzmethodziszviewe
dzaszapplicable.zThezmerezholdingzofz1/3zofzthezstockzisznotzconclusive.
1-4
©zMcGrawzHillzLLC.zAllzrightszreserved.zNozreproductionzorzdistributionzwithoutzthezpriorzwrittenzconsentzofzMcGrawzHillzLLC.
mynursytest.store
