CreatedbBy:bAbSolution
Solution Manual for Advanced Accounting, 14th Edition, Joe Ben Ho
b b b b b b b b b
yle, Thomas Schaefer, Timothy Doupnik, ISBN10: 1260247821, ISBN
b b b b b b b
13: 9781260247824
b
ChapterbOutline
I.
Fourbmethodsbarebprincipallybusedbtobaccountbforbanbinvestmentbinbequitybsecuritiesbalongbw
ithbabfairbvalueboption.
A.
Fairbvaluebmethod:bappliedbbybanbinvestorbwhenbonlybabsmallbpercentagebofbabcompany’sbvo
tingbstockbisbheld.
1. Thebinvestorbrecognizesbincomebwhenbthebinvesteebdeclaresbabdividend.
2.
Portfoliosbarebreportedbatbfairbvalue.bIfbfairbvaluesbarebunavailable,binvestmentbisbreportedbatb
cost.
B.
CostbMethod:bappliedbtobinvestmentsbwithoutbabreadilybdeterminablebfairbvalue.bWhenbthebf
airbvaluebofbanbinvestmentbinbequitybsecuritiesbisbnotbreadilybdeterminable,bandbthebinvestmentbprovi
desbneitherbsignificantbinfluencebnorbcontrol,bthebinvestmentbmaybbebmeasuredbatbcost.bThebinvestm
entbremainsbatbcostbunless
1. Abdemonstrablebimpairmentboccursbforbthebinvestment,bor
2. Anbobservablebpricebchangeboccursbforbidenticalborbsimilarbinvestmentsbofbthebsamebissuer.
Thebinvestorbtypicallybrecognizesbitsbsharebofbinvesteebdividendsbdeclaredbasbdividendbincome.
C.
Consolidation:bwhenbonebfirmbcontrolsbanotherb(e.g.,bwhenbabparentbhasbabmajoritybinterestbi
nbthebvotingbstockbofbabsubsidiaryborbcontrolbthroughbvariablebinterests,btheirbfinancialbstatementsbar
ebconsolidatedbandbreportedbforbthebcombinedbentity.
D.
Equitybmethod:bappliedbwhenbthebinvestorbhasbthebabilitybtobexercisebsignificantbinfluencebo
verboperatingbandbfinancialbpoliciesbofbthebinvestee.
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3.
Abilitybtobsignificantlybinfluencebinvesteebisbindicatedbbybseveralbfactorsbincludingbrepresen
tationbonbthebboardbofbdirectors,bparticipationbinbpolicy-making,betc.
4.
GAAPbguidelinesbpresumebthebequitybmethodbisbapplicablebifb20btob50bpercentbofbtheboutsta
ndingbvotingbstockbofbthebinvesteebisbheldbbybthebinvestor.
Currentbfinancialbreportingbstandardsballowbfirmsbtobelectbtobusebfairbvaluebforbanybnewbinvestmentbi
nbequitybsharesbincludingbthosebwherebthebequitybmethodbwouldbotherwisebapply.bHowever,bthebopt
ion,boncebtaken,bisbirrevocable.bThebinvestorbrecognizesbbothbinvesteebdividendsbandbchangesbinbfair
valueboverbtimebasbincome.
b
II. Accountingbforbanbinvestment:bthebequitybmethod
A.
Thebinvestorbadjustsbthebinvestmentbaccountbtobreflectballbchangesbinbthebequitybofbthebinvest
eebcompany.
B.
Thebinvestorbaccruesbinvesteebincomebwhenbitbisbreportedbinbthebinvestee’sbfinancialbstateme
nts.
C.
DividendsbdeclaredbbybthebinvesteebcreatebabreductionbinbthebcarryingbamountbofbthebInvest
mentbaccount.bThisbbookbassumesballbinvesteebdividendsbarebdeclaredbandbpaidbinbthebsamebreportin
gbperiod.
b
III. Specialbaccountingbproceduresbusedbinbthebapplicationbofbthebequitybmethod
A.
Reportingbabchangebtobthebequitybmethodbwhenbthebabilitybtobsignificantlybinfluencebanbinve
steebisbachievedbthroughbabseriesbofbacquisitions.
1.
Initialbpurchase(s)bwillbbebaccountedbforbbybmeansbofbthebfairbvaluebmethodb(orbatbcost)buntil
thebabilitybtobsignificantlybinfluencebisbattained.
b
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2.
Whenbthebabilitybtobexercisebsignificantbinfluenceboccursbfollowingbabseriesbofbstockbpurcha
ses,bthebinvestorbappliesbthebequitybmethodbprospectively.bThebtotalbfairbvaluebatbthebdatebsignificant
influencebisbattainedbisbcomparedbtobthebinvestee’sbbookbvaluebtobdeterminebfuturebexcessbfairbvalue
b
amortizations.
b
B. Investeebincomebfrombotherbthanbcontinuingboperations
1.
Thebinvestorbrecognizesbitsbsharebofbinvesteebreportedbotherbcomprehensivebincomeb(OCI)bt
hroughbthebinvestmentbaccountbandbthebinvestor’sbownbOCI.
2.
Incomebitemsbsuchbasbdiscontinuedboperationsbthatbarebreportedbseparatelybbybthebinvesteebs
houldbbebshownbinbthebsamebmannerbbybthebinvestor.bThebmaterialitybofbthesebotherbinvesteebincome
elementsb(asbitbaffectsbthebinvestor)bcontinuesbtobbebabcriterionbforbseparatebdisclosure.
b
C. Investeeblosses
1. Lossesbreportedbbybthebinvesteebcreatebcorrespondingblossesbforbthebinvestor.
2.
Abpermanentbdeclinebinbthebfairbvaluebofbanbinvestee’sbstockbshouldbbebrecognizedbimmediat
elybbybthebinvestorbasbanbimpairmentbloss.
3.
Investeeblossesbcanbpossiblybreducebthebcarryingbvaluebofbthebinvestmentbaccountbtobabzerobb
alance.bAtbthatbpoint,bthebequitybmethodbceasesbtobbebapplicablebandbthebfair-
valuebmethodbisbsubsequentlybused.
D. Reportingbthebsalebofbanbequitybinvestment
1.
Thebinvestorbappliesbthebequitybmethodbuntilbthebdisposalbdatebtobestablishbabproperbbookbva
lue.
2.
Followingbthebsale,bthebequitybmethodbcontinuesbtobbebappropriatebifbenoughbsharesbarebstillb
heldbtobmaintainbthebinvestor’sbabilitybtobsignificantlybinfluencebthebinvestee.bIfbthatbabilitybhasbbee
nblost,bthebfair-valuebmethodbisbsubsequentlybused.
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IV. Excessbinvestmentbcostboverbbookbvaluebacquired
A.
Thebpricebanbinvestorbpaysbforbequitybsecuritiesboftenbdiffersbsignificantlybfrombthebinvestee
’sbunderlyingbbookbvaluebprimarilybbecausebthebhistoricalbcostbbasedbaccountingbmodelbdoesbnotbke
epbtrackbofbchangesbinbabfirm’sbfairbvalue.
B.
Paymentsbmadebinbexcessbofbunderlyingbbookbvaluebcanbsometimesbbebidentifiedbwithbspeci
ficbinvesteebaccountsbsuchbasbinventoryborbequipment.
C.
Anbextrabacquisitionbpricebcanbalsobbebassignedbtobanticipatedbbenefitsbthatbarebexpectedbtobb
ebderivedbfrombthebinvestment.bInbaccounting,bthesebamountsbarebpresumedbtobreflectbanbintangibleb
assetbreferredbtobasbgoodwill.bGoodwillbisbcalculatedbasbanybexcessbpaymentbthatbisbnotbattributablebt
obspecificbidentifiablebassetsbandbliabilitiesbofbthebinvestee.bBecausebgoodwillbisbanbindefinite-
livedbasset,bitbisbnotbamortized.
b
V. Deferralbofbintra-entitybgrossbprofitbinbinventory
A. Thebinvestor’sbsharebofbintra-
entitybprofitsbinbendingbinventorybarebnotbrecognizedbuntilbthebtransferredbgoodsbarebeitherbconsume
dborbuntilbtheybarebresoldbtobunrelatedbparties.
B. Downstreambsalesbofbinventory
1. “Downstream”brefersbtobtransfersbmadebbybthebinvestorbtobthebinvestee.
2. Intra-
entitybgrossbprofitsbfrombsalesbarebinitiallybdeferredbunderbthebequitybmethodbandbthenbrecognizedba
sbincomebatbthebtimebofbthebinventory’sbeventualbdisposal.
3.
Thebamountbofbgrossbprofitbtobbebdeferredbisbthebinvestor’sbownershipbpercentagebmultiplied
bybthebmarkupbonbthebmerchandisebremainingbatbthebendbofbthebyear.
b
C. Upstreambsalesbofbinventory
1. “Upstream”brefersbtobtransfersbmadebbybthebinvesteebtobthebinvestor.
2. Underbthebequitybmethod,bthebdeferralbprocessbforbintra-
entitybgrossbprofitsbisbidenticalbforbupstreambandbdownstreambtransfers.bThebproceduresbarebseparat
elybidentifiedbinbChapterbOnebbecausebthebhandlingbdoesbvarybwithinbthebconsolidationbprocess.
A+ Pageb4
Solution Manual for Advanced Accounting, 14th Edition, Joe Ben Ho
b b b b b b b b b
yle, Thomas Schaefer, Timothy Doupnik, ISBN10: 1260247821, ISBN
b b b b b b b
13: 9781260247824
b
ChapterbOutline
I.
Fourbmethodsbarebprincipallybusedbtobaccountbforbanbinvestmentbinbequitybsecuritiesbalongbw
ithbabfairbvalueboption.
A.
Fairbvaluebmethod:bappliedbbybanbinvestorbwhenbonlybabsmallbpercentagebofbabcompany’sbvo
tingbstockbisbheld.
1. Thebinvestorbrecognizesbincomebwhenbthebinvesteebdeclaresbabdividend.
2.
Portfoliosbarebreportedbatbfairbvalue.bIfbfairbvaluesbarebunavailable,binvestmentbisbreportedbatb
cost.
B.
CostbMethod:bappliedbtobinvestmentsbwithoutbabreadilybdeterminablebfairbvalue.bWhenbthebf
airbvaluebofbanbinvestmentbinbequitybsecuritiesbisbnotbreadilybdeterminable,bandbthebinvestmentbprovi
desbneitherbsignificantbinfluencebnorbcontrol,bthebinvestmentbmaybbebmeasuredbatbcost.bThebinvestm
entbremainsbatbcostbunless
1. Abdemonstrablebimpairmentboccursbforbthebinvestment,bor
2. Anbobservablebpricebchangeboccursbforbidenticalborbsimilarbinvestmentsbofbthebsamebissuer.
Thebinvestorbtypicallybrecognizesbitsbsharebofbinvesteebdividendsbdeclaredbasbdividendbincome.
C.
Consolidation:bwhenbonebfirmbcontrolsbanotherb(e.g.,bwhenbabparentbhasbabmajoritybinterestbi
nbthebvotingbstockbofbabsubsidiaryborbcontrolbthroughbvariablebinterests,btheirbfinancialbstatementsbar
ebconsolidatedbandbreportedbforbthebcombinedbentity.
D.
Equitybmethod:bappliedbwhenbthebinvestorbhasbthebabilitybtobexercisebsignificantbinfluencebo
verboperatingbandbfinancialbpoliciesbofbthebinvestee.
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3.
Abilitybtobsignificantlybinfluencebinvesteebisbindicatedbbybseveralbfactorsbincludingbrepresen
tationbonbthebboardbofbdirectors,bparticipationbinbpolicy-making,betc.
4.
GAAPbguidelinesbpresumebthebequitybmethodbisbapplicablebifb20btob50bpercentbofbtheboutsta
ndingbvotingbstockbofbthebinvesteebisbheldbbybthebinvestor.
Currentbfinancialbreportingbstandardsballowbfirmsbtobelectbtobusebfairbvaluebforbanybnewbinvestmentbi
nbequitybsharesbincludingbthosebwherebthebequitybmethodbwouldbotherwisebapply.bHowever,bthebopt
ion,boncebtaken,bisbirrevocable.bThebinvestorbrecognizesbbothbinvesteebdividendsbandbchangesbinbfair
valueboverbtimebasbincome.
b
II. Accountingbforbanbinvestment:bthebequitybmethod
A.
Thebinvestorbadjustsbthebinvestmentbaccountbtobreflectballbchangesbinbthebequitybofbthebinvest
eebcompany.
B.
Thebinvestorbaccruesbinvesteebincomebwhenbitbisbreportedbinbthebinvestee’sbfinancialbstateme
nts.
C.
DividendsbdeclaredbbybthebinvesteebcreatebabreductionbinbthebcarryingbamountbofbthebInvest
mentbaccount.bThisbbookbassumesballbinvesteebdividendsbarebdeclaredbandbpaidbinbthebsamebreportin
gbperiod.
b
III. Specialbaccountingbproceduresbusedbinbthebapplicationbofbthebequitybmethod
A.
Reportingbabchangebtobthebequitybmethodbwhenbthebabilitybtobsignificantlybinfluencebanbinve
steebisbachievedbthroughbabseriesbofbacquisitions.
1.
Initialbpurchase(s)bwillbbebaccountedbforbbybmeansbofbthebfairbvaluebmethodb(orbatbcost)buntil
thebabilitybtobsignificantlybinfluencebisbattained.
b
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2.
Whenbthebabilitybtobexercisebsignificantbinfluenceboccursbfollowingbabseriesbofbstockbpurcha
ses,bthebinvestorbappliesbthebequitybmethodbprospectively.bThebtotalbfairbvaluebatbthebdatebsignificant
influencebisbattainedbisbcomparedbtobthebinvestee’sbbookbvaluebtobdeterminebfuturebexcessbfairbvalue
b
amortizations.
b
B. Investeebincomebfrombotherbthanbcontinuingboperations
1.
Thebinvestorbrecognizesbitsbsharebofbinvesteebreportedbotherbcomprehensivebincomeb(OCI)bt
hroughbthebinvestmentbaccountbandbthebinvestor’sbownbOCI.
2.
Incomebitemsbsuchbasbdiscontinuedboperationsbthatbarebreportedbseparatelybbybthebinvesteebs
houldbbebshownbinbthebsamebmannerbbybthebinvestor.bThebmaterialitybofbthesebotherbinvesteebincome
elementsb(asbitbaffectsbthebinvestor)bcontinuesbtobbebabcriterionbforbseparatebdisclosure.
b
C. Investeeblosses
1. Lossesbreportedbbybthebinvesteebcreatebcorrespondingblossesbforbthebinvestor.
2.
Abpermanentbdeclinebinbthebfairbvaluebofbanbinvestee’sbstockbshouldbbebrecognizedbimmediat
elybbybthebinvestorbasbanbimpairmentbloss.
3.
Investeeblossesbcanbpossiblybreducebthebcarryingbvaluebofbthebinvestmentbaccountbtobabzerobb
alance.bAtbthatbpoint,bthebequitybmethodbceasesbtobbebapplicablebandbthebfair-
valuebmethodbisbsubsequentlybused.
D. Reportingbthebsalebofbanbequitybinvestment
1.
Thebinvestorbappliesbthebequitybmethodbuntilbthebdisposalbdatebtobestablishbabproperbbookbva
lue.
2.
Followingbthebsale,bthebequitybmethodbcontinuesbtobbebappropriatebifbenoughbsharesbarebstillb
heldbtobmaintainbthebinvestor’sbabilitybtobsignificantlybinfluencebthebinvestee.bIfbthatbabilitybhasbbee
nblost,bthebfair-valuebmethodbisbsubsequentlybused.
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IV. Excessbinvestmentbcostboverbbookbvaluebacquired
A.
Thebpricebanbinvestorbpaysbforbequitybsecuritiesboftenbdiffersbsignificantlybfrombthebinvestee
’sbunderlyingbbookbvaluebprimarilybbecausebthebhistoricalbcostbbasedbaccountingbmodelbdoesbnotbke
epbtrackbofbchangesbinbabfirm’sbfairbvalue.
B.
Paymentsbmadebinbexcessbofbunderlyingbbookbvaluebcanbsometimesbbebidentifiedbwithbspeci
ficbinvesteebaccountsbsuchbasbinventoryborbequipment.
C.
Anbextrabacquisitionbpricebcanbalsobbebassignedbtobanticipatedbbenefitsbthatbarebexpectedbtobb
ebderivedbfrombthebinvestment.bInbaccounting,bthesebamountsbarebpresumedbtobreflectbanbintangibleb
assetbreferredbtobasbgoodwill.bGoodwillbisbcalculatedbasbanybexcessbpaymentbthatbisbnotbattributablebt
obspecificbidentifiablebassetsbandbliabilitiesbofbthebinvestee.bBecausebgoodwillbisbanbindefinite-
livedbasset,bitbisbnotbamortized.
b
V. Deferralbofbintra-entitybgrossbprofitbinbinventory
A. Thebinvestor’sbsharebofbintra-
entitybprofitsbinbendingbinventorybarebnotbrecognizedbuntilbthebtransferredbgoodsbarebeitherbconsume
dborbuntilbtheybarebresoldbtobunrelatedbparties.
B. Downstreambsalesbofbinventory
1. “Downstream”brefersbtobtransfersbmadebbybthebinvestorbtobthebinvestee.
2. Intra-
entitybgrossbprofitsbfrombsalesbarebinitiallybdeferredbunderbthebequitybmethodbandbthenbrecognizedba
sbincomebatbthebtimebofbthebinventory’sbeventualbdisposal.
3.
Thebamountbofbgrossbprofitbtobbebdeferredbisbthebinvestor’sbownershipbpercentagebmultiplied
bybthebmarkupbonbthebmerchandisebremainingbatbthebendbofbthebyear.
b
C. Upstreambsalesbofbinventory
1. “Upstream”brefersbtobtransfersbmadebbybthebinvesteebtobthebinvestor.
2. Underbthebequitybmethod,bthebdeferralbprocessbforbintra-
entitybgrossbprofitsbisbidenticalbforbupstreambandbdownstreambtransfers.bThebproceduresbarebseparat
elybidentifiedbinbChapterbOnebbecausebthebhandlingbdoesbvarybwithinbthebconsolidationbprocess.
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