Solution Manual for Advanced Accounting 15th Edition by Hoyle, Schaefer, Doupnik | Chapters 1-19

SolutionJManualJForJAllJChapters




SOLUTION MANUAL FOR J J



ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAEF
J J J J J J J J J


ER AND TIMOTHY DOUPNIK
J J J



CHAPTER 1-19 J




CHAPTER 1 TH J J



E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
J J J J J J




ChapterJOutline

I. FourJmethodsJareJprincipallyJusedJtoJaccountJforJanJinvestmentJinJequityJsecuritiesJalongJ
withJaJfairJvalueJoption.

A. FairJvalueJmethod:JappliedJbyJanJinvestorJwhenJonlyJaJsmallJpercentageJofJaJ
company‘sJvotingJstockJisJheld.

1. TheJinvestorJrecognizesJincomeJwhenJtheJinvesteeJdeclaresJaJdividend.

2. PortfoliosJareJreportedJatJfairJvalue.JIfJfairJvaluesJareJunavailable,JinvestmentJisJr
eportedJatJcost.

B. CostJMethod:JappliedJtoJinvestmentsJwithoutJaJreadilyJdeterminableJfairJvalue.JWhenJt
heJfairJvalueJofJanJinvestmentJinJequityJsecuritiesJisJnotJreadilyJdeterminable,JandJtheJin
vestmentJprovidesJneitherJsignificantJinfluenceJnorJcontrol,JtheJinvestmentJmayJbeJme
asuredJatJcost.JTheJinvestmentJremainsJatJcostJunless

1. AJdemonstrableJimpairmentJoccursJforJtheJinvestment,Jor

2. AnJobservableJpriceJchangeJoccursJforJidenticalJorJsimilarJinvestmentsJofJtheJsameJi
ssuer.
TheJinvestorJtypicallyJrecognizesJitsJshareJofJinvesteeJdividendsJdeclaredJasJdividendJin
come.

C. Consolidation:JwhenJoneJfirmJcontrolsJanotherJ(e.g.,JwhenJaJparentJhasJaJmajorityJint
erestJinJtheJvotingJstockJofJaJsubsidiaryJorJcontrolJthroughJvariableJinterests,JtheirJfin
ancialJstatementsJareJconsolidatedJandJreportedJforJtheJcombinedJentity.

D. EquityJmethod:JappliedJwhenJtheJinvestorJhasJtheJabilityJtoJexerciseJsignificantJi
nfluenceJoverJoperatingJandJfinancialJpoliciesJofJtheJinvestee.

1. AbilityJtoJsignificantlyJinfluenceJinvesteeJisJindicatedJbyJseveralJfactorsJincludingJr
epresentationJonJtheJboardJofJdirectors,JparticipationJinJpolicy-making,Jetc.

2. GAAPJguidelinesJpresumeJtheJequityJmethodJisJapplicableJifJ20JtoJ50JpercentJofJthe



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©JMcGrawJHillJLLC.JAllJrightsJreserved.JNoJreproductionJorJdistributionJwithoutJtheJpriorJwrittenJconsentJofJMcGrawJHillJLLC
.

, outstandingJvotingJstockJofJtheJinvesteeJisJheldJbyJtheJinvestor.

CurrentJfinancialJreportingJstandardsJallowJfirmsJtoJelectJtoJuseJfairJvalueJforJanyJnewJinvest
mentJinJequityJsharesJincludingJthoseJwhereJtheJequityJmethodJwouldJotherwiseJapply.JHow
ever,JtheJoption,JonceJtaken,JisJirrevocable.JTheJinvestorJrecognizesJbothJinvesteeJdividend
sJandJchangesJinJfairJvalueJoverJtimeJasJincome.



II. AccountingJforJanJinvestment:JtheJequityJmethod

A. TheJinvestorJadjustsJtheJinvestmentJaccountJtoJreflectJallJchangesJinJtheJequityJofJtheJi
nvesteeJcompany.

B. TheJinvestorJaccruesJinvesteeJincomeJwhenJitJisJreportedJinJtheJinvestee‘sJfinancialJ
statements.

C. DividendsJdeclaredJbyJtheJinvesteeJcreateJaJreductionJinJtheJcarryingJamountJofJtheJIn
vestmentJaccount.JThisJbookJassumesJallJinvesteeJdividendsJareJdeclaredJandJpaidJinJ
theJsameJreportingJperiod.

III. SpecialJaccountingJproceduresJusedJinJtheJapplicationJofJtheJequityJmethod
A. ReportingJaJchangeJtoJtheJequityJmethodJwhenJtheJabilityJtoJsignificantlyJinfluenceJanJi
nvesteeJisJachievedJthroughJaJseriesJofJacquisitions.
1. InitialJpurchase(s)JwillJbeJaccountedJforJbyJmeansJofJtheJfairJvalueJmethodJ(orJatJc
ost)JuntilJtheJabilityJtoJsignificantlyJinfluenceJisJattained.
2. WhenJtheJabilityJtoJexerciseJsignificantJinfluenceJoccursJfollowingJaJseriesJofJstockJ
purchases,JtheJinvestorJappliesJtheJequityJmethodJprospectively.JTheJtotalJfairJvalu
eJatJtheJdateJsignificantJinfluenceJisJattainedJisJcomparedJtoJtheJinvestee‘sJbookJval
ueJtoJdetermineJfutureJexcessJfairJvalueJamortizations.
B. InvesteeJincomeJfromJotherJthanJcontinuingJoperations
1. TheJinvestorJrecognizesJitsJshareJofJinvesteeJreportedJotherJcomprehensiveJi
ncomeJ(OCI)JthroughJtheJinvestmentJaccountJandJtheJinvestor‘sJownJOCI.
2. IncomeJitemsJsuchJasJdiscontinuedJoperationsJthatJareJreportedJseparatelyJbyJtheJi
nvesteeJshouldJbeJshownJinJtheJsameJmannerJbyJtheJinvestor.JTheJmaterialityJofJth
eseJotherJinvesteeJincomeJelementsJ(asJitJaffectsJtheJinvestor)JcontinuesJtoJbeJaJcri
terionJforJseparateJdisclosure.
C. InvesteeJlosses
1. LossesJreportedJbyJtheJinvesteeJcreateJcorrespondingJlossesJforJtheJinvestor.
2. AJpermanentJdeclineJinJtheJfairJvalueJofJanJinvestee‘sJstockJshouldJbeJrecognizedJi
mmediatelyJbyJtheJinvestorJasJanJimpairmentJloss.
3. InvesteeJlossesJcanJpossiblyJreduceJtheJcarryingJvalueJofJtheJinvestmentJaccountJto
JaJzeroJbalance.JAtJthatJpoint,JtheJequityJmethodJceasesJtoJbeJapplicableJandJtheJfai

r-valueJmethodJisJsubsequentlyJused.
D. ReportingJtheJsaleJofJanJequityJinvestment
1. TheJinvestorJappliesJtheJequityJmethodJuntilJtheJdisposalJdateJtoJestablishJaJproperJ
bookJvalue.
2. FollowingJtheJsale,JtheJequityJmethodJcontinuesJtoJbeJappropriateJifJenoughJsharesJ
areJstillJheldJtoJmaintainJtheJinvestor‘sJabilityJtoJsignificantlyJinfluenceJtheJinvestee.JIf
JthatJabilityJhasJbeenJlost,JtheJfair-valueJmethodJisJsubsequentlyJused.




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.

,SolutionJManualJForJAllJChapters


IV. ExcessJinvestmentJcostJoverJbookJvalueJacquired
A. TheJpriceJanJinvestorJpaysJforJequityJsecuritiesJoftenJdiffersJsignificantlyJfromJtheJi
nvestee‘sJunderlyingJbookJvalueJprimarilyJbecauseJtheJhistoricalJcostJbasedJacco
untingJmodelJdoesJnotJkeepJtrackJofJchangesJinJaJfirm‘sJfairJvalue.
B. PaymentsJmadeJinJexcessJofJunderlyingJbookJvalueJcanJsometimesJbeJidentifiedJwithJ
specificJinvesteeJaccountsJsuchJasJinventoryJorJequipment.
C. AnJextraJacquisitionJpriceJcanJalsoJbeJassignedJtoJanticipatedJbenefitsJthatJareJexpect
edJtoJbeJderivedJfromJtheJinvestment.JInJaccounting,JtheseJamountsJareJpresumedJtoJr
eflectJanJintangibleJassetJreferredJtoJasJgoodwill.JGoodwillJisJcalculatedJasJanyJexcessJ
paymentJthatJisJnotJattributableJtoJspecificJidentifiableJassetsJandJliabilitiesJofJtheJinves
tee.JBecauseJgoodwillJisJanJindefinite-livedJasset,JitJisJnotJamortized.

V. DeferralJofJintra-entityJgrossJprofitJinJinventory
A. TheJinvestor‘sJshareJofJintra-
entityJprofitsJinJendingJinventoryJareJnotJrecognizedJuntilJtheJtransferredJgoodsJareJeithe
rJconsumedJorJuntilJtheyJareJresoldJtoJunrelatedJparties.
B. DownstreamJsalesJofJinventory
1. ―Downstream‖JrefersJtoJtransfersJmadeJbyJtheJinvestorJtoJtheJinvestee.
2. Intra-
entityJgrossJprofitsJfromJsalesJareJinitiallyJdeferredJunderJtheJequityJmethodJandJth
enJrecognizedJasJincomeJatJtheJtimeJofJtheJinventory‘sJeventualJdisposal.
3. TheJamountJofJgrossJprofitJtoJbeJdeferredJisJtheJinvestor‘sJownershipJpercentageJ
multipliedJbyJtheJmarkupJonJtheJmerchandiseJremainingJatJtheJendJofJtheJyear.
C. UpstreamJsalesJofJinventory
1. ―Upstream‖JrefersJtoJtransfersJmadeJbyJtheJinvesteeJtoJtheJinvestor.
2. UnderJtheJequityJmethod,JtheJdeferralJprocessJforJintra-
entityJgrossJprofitsJisJidenticalJforJupstreamJandJdownstreamJtransfers.JTheJproced
uresJareJseparatelyJidentifiedJinJChapterJOneJbecauseJtheJhandlingJdoesJvaryJwithi
nJtheJconsolidationJprocess.


AnswersJtoJDiscussionJQuestions
TheJtextbookJincludesJdiscussionJquestionsJtoJstimulateJstudentJthoughtJandJdiscussion.JTheseJqu
estionsJareJalsoJdesignedJtoJallowJstudentsJtoJconsiderJrelevantJissuesJthatJmightJotherwiseJbeJove
rlooked.JSomeJofJtheseJquestionsJmayJbeJaddressedJbyJtheJinstructorJinJclassJtoJmotivateJstudentJ
discussion.JStudentsJshouldJbeJencouragedJtoJbeginJbyJdefiningJtheJissue(s)JinJeachJcase.JNext,Ja
uthoritativeJaccountingJliteratureJ(FASBJASC)JorJotherJrelevantJliteratureJcanJbeJconsultedJasJaJpre
liminaryJstepJinJarrivingJatJlogicalJactions.JFrequently,JtheJFASBJAccountingJStandardsJCodificatio
nJwillJprovideJtheJnecessaryJsupport.

Unfortunately,JinJaccounting,JdefinitiveJresolutionsJtoJfinancialJreportingJquestionsJareJnotJalwaysJa
vailable.JStudentsJoftenJseemJtoJbelieveJthatJallJaccountingJissuesJhaveJbeenJresolvedJinJtheJpastJ
soJthatJaccountingJeducationJisJonlyJaJmatterJofJlearningJtoJapplyJhistoricallyJprescribedJprocedure
s.JHowever,JinJactualJpractice,JtheJonlyJrealJanswerJisJoftenJtheJoneJthatJprovidesJtheJfairestJrepres
entationJofJtheJfirm‘sJtransactions.JIfJanJauthoritativeJsolutionJisJnotJavailable,JstudentsJshouldJbeJdi
rectedJtoJlistJallJofJtheJissuesJinvolvedJandJtheJconsequencesJofJpossibleJalternativeJactions.JTheJv
ariousJfactorsJpresentedJcanJbeJweighedJtoJproduceJaJviableJsolution.

TheJdiscussionJquestionsJareJdesignedJtoJhelpJstudentsJdevelopJresearchJandJcriticalJthinkingJskill
sJinJaddressingJissuesJthatJgoJbeyondJtheJpurelyJmechanicalJelementsJofJaccounting.



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©JMcGrawJHillJLLC.JAllJrightsJreserved.JNoJreproductionJorJdistributionJwithoutJtheJpriorJwrittenJconsentJofJMcGrawJHillJLLC
.

, DidJtheJCostJMethodJInviteJManipulation?
TheJcostJmethodJofJaccountingJforJinvestmentsJoftenJcausedJaJlackJofJobjectivityJinJreportedJincom
eJfigures.JWithJaJlargeJblockJofJtheJinvestee‘sJvotingJshares,JanJinvestorJcouldJinfluenceJtheJamount
JandJtimingJofJtheJinvestee‘sJdividendJdeclarations.JThus,JwhenJenjoyingJaJgoodJearningsJyear,JanJi

nvestorJmightJinfluenceJtheJinvesteeJtoJwithholdJdeclaringJaJdividendJuntilJneededJinJaJsubsequentJ
year.JAlternatively,JifJtheJinvestorJjudgedJthatJitsJcurrentJyearJearningsJ―neededJaJboost,‖JitJmightJin
fluenceJtheJinvesteeJtoJdeclareJaJcurrentJyearJdividend.JTheJequityJmethodJeffectivelyJremovesJma
nagers‘JabilityJtoJincreaseJcurrentJincomeJ(orJdeferJincomeJtoJfutureJperiods)JthroughJtheirJinfluenc
eJoverJtheJtimingJandJamountsJofJinvesteeJdividendJdeclarations.
AtJfirstJglanceJitJmayJseemJthatJtheJfairJvalueJmethodJallowsJmanagersJtoJmanipulateJincomeJbeca
useJinvesteeJdividendsJareJrecordedJasJincomeJbyJtheJinvestor.JHowever,JdividendsJpaidJtypicallyJ
areJaccompaniedJbyJaJdecreaseJinJfairJvalueJ(alsoJrecognizedJinJincome),JthusJleavingJreportedJnet
JincomeJunaffected.



DoesJtheJEquityJMethodJReallyJApplyJHere?
TheJdiscussionJinJtheJcaseJbetweenJtheJtwoJaccountantsJisJlimitedJtoJtheJreasonJforJtheJinvestment
JacquisitionJandJtheJcurrentJpercentageJofJownership.JInstead,JtheyJshouldJbeJexaminingJtheJactual

JinteractionJthatJcurrentlyJexistsJbetweenJtheJtwoJcompanies.JAlthoughJtheJabilityJtoJexerciseJsignifi

cantJinfluenceJoverJoperatingJandJfinancialJpoliciesJappearsJtoJbeJaJratherJvagueJcriterion,JASCJ32
3J"Investments—
EquityJMethodJandJJointJVentures,"JclearlyJspecifiesJactualJeventsJthatJindicateJthisJlevelJofJauthori
tyJ(paragraphJ323-10-15-6):

AbilityJtoJexerciseJthatJinfluenceJmayJbeJindicatedJinJseveralJways,JsuchJasJrepresentationJonJtheJb
oardJofJdirectors,JparticipationJinJpolicy-makingJprocesses,JmaterialJintra-
entityJtransactions,JinterchangeJofJmanagerialJpersonnel,JorJtechnologicalJdependency.JAnotherJi
mportantJconsiderationJisJtheJextentJofJownershipJbyJanJinvestorJinJrelationJtoJtheJconcentrationJofJ
otherJshareholdings,JbutJsubstantialJorJmajorityJownershipJofJtheJvotingJstockJofJanJinvesteeJcomp
anyJbyJanotherJinvestorJdoesJnotJnecessarilyJprecludeJtheJabilityJtoJexerciseJsignificantJinfluenceJb
yJtheJinvestor.

InJthisJcase,JtheJaccountantsJwouldJbeJwiseJtoJdetermineJwhetherJDennisJBostitchJorJanyJotherJme
mberJofJtheJHighlandJLaboratoriesJadministrationJisJparticipatingJinJtheJmanagementJofJAbraham,JI
nc.JIfJanyJindividualJfromJHighland'sJorganizationJisJonJAbraham‘sJboardJofJdirectorsJorJisJparticipati
ngJinJmanagementJdecisions,JtheJequityJmethodJwouldJseemJtoJbeJappropriate.
Likewise,JifJsignificantJtransactionsJhaveJoccurredJbetweenJtheJcompaniesJ(suchJasJloansJbyJHighl
andJtoJAbraham),JtheJabilityJtoJapplyJsignificantJinfluenceJbecomesJmuchJmoreJevident.

However,JifJJamesJAbrahamJcontinuesJtoJoperateJAbraham,JInc.,JwithJlittleJorJnoJregardJforJHighlan
d,JtheJequityJmethodJshouldJnotJbeJapplied.JThisJpossibilityJseemsJespeciallyJlikelyJinJthisJcaseJsinc
eJoneJstockholder,JJamesJAbraham,JcontinuesJtoJholdJaJmajorityJ(2/3)JofJtheJvotingJ stock.JThus,Jevi
denceJofJtheJabilityJtoJapplyJsignificantJinfluenceJmustJbeJpresentJbeforeJtheJequityJmethodJisJviewe
dJasJapplicable.JTheJmereJholdingJofJ1/3JofJtheJstockJisJnotJconclusive.




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©JMcGrawJHillJLLC.JAllJrightsJreserved.JNoJreproductionJorJdistributionJwithoutJtheJpriorJwrittenJconsentJofJMcGrawJHillJLLC
.