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Giáo trình advanced accounting 13e by hoyle

Thirteenth Edition

Joe B. Hoyle
Associate Professor of Accounting
Robins School of Business
University of Richmond

Thomas F. Schaefer
KPMG Professor of Accountancy
Mendoza College of Business
University of Notre Dame

Timothy S. Doupnik
Associate Professor of Accounting
School of Business
College of Charleston

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Library of Congress Cataloging-in-Publication Data
Names: Hoyle, Joe Ben, author. | Schaefer, Thomas F., author. | Doupnik,
   Timothy S., author.
Title: Advanced accounting / Joe B. Hoyle, Associate Professor of Accounting,
   Robins School of Business, University of Richmond, Thomas F. Schaefer,

   KPMG Professor of Accountancy, Mendoza College of Business, University of
   Notre Dame, Timothy S. Doupnik, Associate Professor of Accounting, School
   of Business, College of Charleston.
Description: Thirteenth Edition. | New York, NY : McGraw-Hill Education,
   2016. | Revised edition of the authors’ Advanced accounting, 2015.
Identifiers: LCCN 2016040833 | ISBN 9781259444951 (hardback)
Subjects: LCSH: Accounting. | BISAC: BUSINESS & ECONOMICS / Accounting /
Classification: LCC HF5636 .H69 2016 | DDC 657/.046—dc23
LC record available at https://lccn.loc.gov/2016040833
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the information presented at these sites.


To our families

The real purpose of books is to trap the
mind into doing its own thinking.
—Christopher Morley

About the Authors
Joe B. Hoyle, University of Richmond

Joe B. Hoyle is associate professor of accounting at the Robins School of Business at the
University of Richmond, where he teaches intermediate accounting, financial accounting,
and advanced accounting. In 2015, he was the first recipient of the J. Michael and Mary
Anne Cook Prize for undergraduate teaching. The Cook Prize is awarded by the American
Accounting Association and “is the foremost recognition of an individual who consistently
demonstrates the attributes of a superior teacher in the discipline of accounting.” Professor
Hoyle has also been named (in 2007) as the Virginia Professor of the Year by the Carnegie
Foundation for the Advancement of Teaching and the Center for Advancement and Support
of Education. He has been selected as a Distinguished Educator five times at the University
of Richmond and Professor of the Year on two occasions. He has authored a book of essays
titled Tips and Thoughts on Improving the Teaching Process in College, which is available
at http://oncampus.richmond.edu/∼ jhoyle/. His blog, Teaching—Getting the Most from Your
Students, at http://joehoyle-teaching.blogspot.com/ was named the Accounting Education
Innovation of the Year for 2013 by the American Accounting Association.

Thomas F. Schaefer, University of Notre Dame

Thomas F. Schaefer is the KPMG Professor of Accounting at the University of Notre Dame.
He has written a number of articles for scholarly journals such as The Accounting Review,
Journal of Accounting Research, Journal of Accounting & Economics, Accounting Horizons, and others. His primary teaching and research interests are in financial accounting and
reporting. Tom is a past president of the American Accounting Association’s Accounting
Program Leadership Group. He received the 2007 Joseph A. Silvoso Faculty Merit Award
from the Federation of Schools of Accountancy and the 2013 Notre Dame Master of Science
in Accountancy Dincolo Outstanding Professor Award.

Timothy S. Doupnik, College of Charleston

Timothy S. Doupnik is distinguished professor emeritus of accounting at the University of
South Carolina. He is a current member of the accounting faculty at the College of Charleston, where he teaches advanced and international accounting. Tim has published extensively
in the area of international accounting in journals such as The Accounting Review; Accounting, Organizations, and Society; Abacus; International Journal of Accounting; and Journal
of International Business Studies. Tim is a past president of the American Accounting Association’s International Accounting Section and a recipient of the section’s Outstanding International Accounting Educator Award.


Advanced Accounting 13e Stays Current
Overall—this edition of the text
provides relevant and up-to-date
­accounting standards references
to the Financial Accounting
Standards Board (FASB) Accounting Standards Codification® (ASC).
Chapter Changes for Advanced
Accounting, 13th Edition:

Chapter 1
∙ Updated the chapter to reflect Accounting Standards
Update (ASU) No. 2016-07 to ASC Topic 323,
Investments—Equity Method and Joint Ventures,
entitled “Simplifying the Transition to the Equity
Method of Accounting.” The ASU is effective for
fiscal years beginning after December 15, 2016.
The ASU eliminates the requirement to retrospectively apply the equity method to previously held
ownership interests in an investee when an increase
in ownership results in significant influence and thus
qualifies for use of the equity method. 
∙ Updated coverage for  Accounting Standards Update
(ASU) No. 2016-01, Financial Instruments—­Overall,
which requires  equity investments (except those
accounted for under the equity method of accounting
or those that result in consolidation of the investee) to
be measured at fair value with changes in fair value
recognized in net  income, unless fair values are not
readily determinable. Thus, the previously available-forsale category with fair value changes recorded in other
comprehensive income will no longer be available.
The ASU is effective for fiscal years beginning after
December 15, 2017, with early adoption permitted.
∙ Eliminate coverage of investee extraordinary items
to align the text coverage with Accounting Standards
Update No. 2015-01 which eliminates the concept of
extraordinary items.
∙ Updated terminology in discussion of intra-entity
gross profits to reflect the new revenue recognition
standards (ASC 606).
∙ Updated real-world references.
∙ Added and revised several end-of-chapter problems.

Chapter 2
∙ Added new descriptive coverage of three recent realworld business combinations—Facebook and WhatsApp, AT&T and DirecTV, and MeadwestVaco and
∙ Revised chapter learning objectives to focus on
combinations when the acquired firm is dissolved
vs. continued existence. The chapter also newly
­recognizes a learning objective on the related costs
that typically accompany business combinations.
∙ Added an updated appendix on pushdown accounting based on  Accounting Standards Update (ASU)
No.2014-17, Business Combinations: Pushdown
Accounting. The ASU allows companies an option
to apply pushdown accounting for newly acquired
∙ Updated real-world references.
∙ In addition to several new and revised end-of-­chapter
problems, replaced/added new research cases that
provide students with real-world applications of
financial reporting for business combinations.

Chapter 3
∙ Added coverage of post-acquisition procedures for
excess fair value attributable to subsidiary long-term
debt. Moved coverage of pushdown accounting to
Chapter 2.
∙ Added a Discussion Question that addresses worksheet adjustments to the parent’s beginning-of-theyear retained earnings.
∙ Updated real-world references.
∙ Added an appendix covering Accounting Standards Update (ASU 2014-02) to Topic 350,
“Intangibles—Goodwill and Other, on Accounting for Goodwill. The ASU provides  an external
reporting option (i.e., amortization) for private
company goodwill accounting. The appendix also
covers  ASU 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination,
an amendment of Business Combinations (Topic
805). The new standards allow private companies
an option to simplify their accounting by recognizing fewer intangible assets in future business
∙ Added new equity method end-of-chapter problems
requiring the preparation of consolidated financial
statements subsequent to acquisition. In addition,

as the Accounting Profession Changes
changed the facts and requirements in several endof-chapter problems.
∙ Added a new research and analysis case on Microsoft’s 2015 goodwill impairment loss.

Chapter 4
∙ Updated real-world references.
∙ Added two new equity method end-of-chapter problems.
∙ Added new end-of-chapter cases using the financial
reports of Starbucks (step-acquisition example) and
Costco (various noncontrolling interest figures and
∙ Revised the end-of-chapter comprehensive FASB ASC
and IFRS research case. The new case, entitled Bardeen
Electric, continues to focus on valuation issues accompanying a business combination including alternative
goodwill measurement under IFRS. In addition, several
other end-of-chapter problems have been revised.

Chapter 5
∙ Updated terminology in discussion of intra-entity
gross profits to reflect the new revenue recognition
standards (ASC 606).
∙ Revised and expanded coverage of the deferral and
subsequent recognition of intra-entity gains on longterm assets transfers across affiliates. The revised exposition emphasizes the nature of reallocating intra-entity
gains across time increasing consistency with the chapter’s coverage of intra-entity gross profits in inventory.
∙ Updated real-world references.
∙ Changed the facts and requirements in several endof-chapter problems.

Chapter 6
∙ Updated real-world references.
∙ Expanded coverage of post-control period reporting
for primary beneficiaries and variable interest entities including an example of consolidated statement
∙ Added and revised several end-of-chapter problems.

Chapter 7
∙ Updated real-world references.
∙ Added coverage of the FASB 2015 Proposed
Accounting Standards Update  on Income Taxes

(Topic 740), entitled Intra-Entity Asset Transfers.
The proposed accounting would converge the IFRS
and U.S. GAAP treatment.
∙ Updated terminology in discussion of intra-entity
gross profits to reflect the new revenue recognition
standards (ASC 606).
∙ Changed the facts and requirements in several endof-chapter problems.

Chapter 8
∙ Deleted the section within Interim Reporting related
to extraordinary items.
∙ Added a real-world example of a company with seasonal items. 
∙ Added the name of the relevant international standard to the title of sections on IFRS. 
∙ Removed reference to IFRS from the learning
∙ Updated references to actual company practices and
excerpts from annual reports.
∙ Changed the facts in several end-of-chapter

Chapter 9
∙ Reduced the size of Exhibit 9.1 containing exchange
rates for selected countries.
∙ Rewrote the section now titled Forward Contracts
that was previously titled Spot and Forward Rates.
∙ Moved the section on foreign currency borrowing
from the end of the chapter to immediately follow
the section on foreign currency transactions.
∙ Moved the portion of the IFRS section at the end of
the chapter that deals with foreign currency transactions to immediately follow the section on foreign
currency borrowing. 
∙ Expanded the learning objective related to how forward contracts and foreign currency options can
be used to hedge foreign exchange risk to include
understanding what types of foreign exchange risk
can be hedged. 
∙ Added new learning objectives on the accounting
guidelines for derivatives and the basics of hedge
∙ Updated real-world references including examples
of company practices, excerpts from annual reports,
and foreign exchange rates.

∙ Added language to more clearly explain the impact
that the accounting for a derivative financial instrument used to hedge a foreign exchange risk has on
financial statements within the examples demonstrating the accounting for various types of foreign
currency hedges.
∙ Updated the section at the end of the chapter that
summarizes the accounting for derivative financial
instruments under IFRS. 
∙ Changed the facts in several end-of-chapter
∙ Updated the develop your skills assignments based
on actual exchange rates.

∙ Deleted the section “A Principles-Based Approach
to Standard Setting.”
∙ Revised the Comprehensive Illustration to show the
process for determining conversion worksheet entries
necessary to convert from IFRS to U.S. GAAP for
nine differences between the two sets of standards. 
∙ Added several new questions related to material
added to the chapter.
∙ Added several new problems focusing on the conversion of IFRS to U.S. GAAP.
∙ Deleted the end-of-chapter case related to “Voluntary Adoption of IFRS” and added a new case related
to “IFRS Website.”

Chapter 10

Chapter 12

∙ Updated references to actual company practice and
related excerpts from annual reports.
∙ In the section on Exchange Rates Used in Translation, added instruction to first read the related Discussion Question before continuing.
∙ Removed reference to the theoretical possibility of
translating income statement items at the current
exchange rate.
∙ Removed reference to a research study published in
1988 that investigated the weighting of functional
currency indicators.
∙ Moved the section on IFRS from the end of the
chapter to immediately after the section describing
U.S. authoritative literature.
∙ Changed facts in several end-of-chapter problems.

Chapter 11
∙ Updated real-world references.
∙ Removed the discussion of culture as a reason for
accounting diversity and the section “A General
Model of the Reasons for International Differences
in Financial Reporting.”
∙ Expanded discussion of results from the FASBIASB convergence process to include a new exhibit
summarizing successful convergence projects.
∙ Added a section on “IFRS for SMEs.”
∙ Added a section on the “Relevance of IFRS for U.S.
∙ Removed the section “U.S. GAAP Reconciliations.”
∙ Added a major new section focusing on the “­Conversion
of IFRS Financial Statements to U.S. GAAP.”

∙ Updated SEC data and Registration Statement
∙ Updated SEC division information.
∙ Updated web link references as necessary.
∙ Revised end-of-chapter material.

Chapter 13 
∙ Added discussion of reporting issues that companies face as the possibility of bankruptcy grows,
such as the need to test goodwill and other assets
for impairment and the possibility that a valuation
allowance is required to offset any deferred income
tax assets.
∙ Presented coverage of new FASB pronouncement:
Accounting Standards Update 2014-15 (“Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern”) which provides accounting and reporting guidance if the possibility arises
that substantial doubt exists as to whether a company
will be able to remain a going concern.
∙ Included additional discussion about the liquidation
basis of accounting, including examples of the necessary financial statements.
∙ Revised references to include companies that have
recently experienced bankruptcy and liquidation
such as RadioShack.

Chapter 14
∙ Revised tables showing the allocation of partnership
income/loss across partners to provide additional

emphasis on the step-by-step nature of the income
distribution across partners.
∙ Changed the facts and requirements in several endof-chapter problems.

Chapter 15
∙ Split an existing end-of-chapter problem with two
unrelated parts into two separate problems.
∙ Added a new end-of-chapter problem related to
learning objectives LO 15-2 and LO 15-5.
∙ Changed the facts and requirements in several endof-chapter problems.

Chapter 16
∙ Updated numerous references to the financial statements of a wide variety of state and local governments such as the City of Baltimore, the City of
Houston, the City of Charlotte, and the City of

Chapter 17
∙ Provided coverage of new pronouncement: GASB
Statement No. 76, “The Hierarchy of Generally
Accepted Accounting Principles for State and Local

∙ Provided coverage of new pronouncement: GASB
Statement No. 77, “Tax Abatement Disclosures.”
∙ Updated references to the financial statements of
state and local governments such as the City of Los
Angeles, the City of Chicago, the City of Orlando,
and the City of Boston.

Chapter 18
∙ Discussed the potential implications of FASB’s current projects on the presentation and disclosure of
financial statements by not-for-profit entities
∙ Updated numerous references to the financial statements of a wide variety of private not-for-profit entities such as ChildFund International, Girl Scouts of
the United States of America, American Heart Association, and Georgetown University.

Chapter 19
∙ Updated tax code references, numbers, and statistics.
∙ Included coverage of the American Taxpayer Relief
Act of 2012.
∙ Revised web links in footnote references as
∙ Revised end-of-chapter material reflecting changes
from the chapter.


Students Solve the Accounting Puzzle
The approach used by
Hoyle, Schaefer, and
Doupnik allows students to
think critically about accounting, just as they will
in their careers and as they
prepare for the CPA exam.
Read on to understand
how students will succeed
as accounting majors and
as future CPAs by using
­Advanced Accounting, 13e.

Thinking Critically
With this text, students gain a well-balanced appreciation
of the accounting profession. As Hoyle 13e introduces
them to the field’s many aspects, it often focuses on past
controversies and present resolutions. The text shows the
development of financial reporting as a product of intense
and considered debate that continues today and will in the

The writing style of the 12 previous editions has been
highly praised. Students easily comprehend chapter concepts because of theConfirming
tone used throughout
the book. The authors have made every effort to ensure that
the writing style remains engaging, lively, and consistent.
Consolidation of Financial Information 41

Recent Notable Business


Berkshire Hathaway, Inc.
Visa, Inc.
Facebook, Inc.
Intel Corporation
CVS Health Corporation
Celgene Corporation
Cox Automotive
Microsemi Corporation
Constellation Brands


Real-World Examples
Deal Value

Students are
better able to relate what
they learn $23.3B
to what they will encounter in the
business world
$16.0B after reading these frequent
Quotations, articles, and illustra$12.9B
tions from$ Forbes,
The Wall Street Journal,
Time, and $Bloomberg
BusinessWeek are
$ 7.2B
throughout the text. Data have
$ 4.0B
$ 4.8B
First Pages
been pulled
business, not-for-profit,
$ 3.9B
government financial statements as well as
$ 1.0B
official pronouncements.

Precision Castparts
Visa Europe Ltd
Altera Corporation
Omnicare, Inc.
Starwood Hotels Intl
Plum Creek Timber
Receptos, Inc.
Dealertrack Technologies
TNT Express
PMC-Sierra, Inc.
Ballast Point Brewing & Spirits

and delivery, substantial savings can result. As an example, Oracle’s acquisiChapter manufacturing,

tion of Sun Microsystems creates synergies by enabling Oracle to integrate its software product lines with Sun’s hardware specifications. The acquisition further allows Oracle to offer
complete systems made of chips, computers, storage devices, and software with an aim
toward increased efficiency and quality.2 Other cost savings resulting from elimination of
duplicate efforts, such as data processing and marketing, can make a single entity more profitable than the separate parent and subsidiary had been in the past. Such synergies often accompany business combinations.
Although no two business combinations are exactly alike, many share one or more of the
that potentially
enhance profitability:

Discussion Question

Discussion Questions

This feature facilitates student understanding of the underlying accounting principles at
in in
∙ In
of one
and Warren
another Buffett,
or the
reporting situations. Simipost-control
step acquisitions of Marmon Holdings, Inc., observed the following:
lar to minicases, these questions help explain
∙ Cost savings through elimination of duplicate facilities and staff.
Marmon provides an example of a clear and substantial gap existing between book
∙ value
Quick and
for newvalue.
and existing
markets.at hand in practical terms. Many
Let me explain the odd origin of
∙ Economies
ofI scale
power.in Marmon, raising our
Last year
told you
that greater
we hadefficiency
cases are designed to demon∙ ownership
The ability to
at more
rates. As
firm sizeI also
80% (up
from the
we acquired
in 2008).
told you that GAAP
accounting required us to immediately record the 2011 purchase on our books at farwhy
less a topic is problematic
∙ than
of business
what we paid.
I’ve now
had a year to think about this
and worth considering.


yet to find
an explanation
any sense—nor
Charlie or
Marc Hamburg,
also occur
firms seek the
of their our
CFO, comeoften
up with
My confusion
when Iover
am told
if we hadn’t
areas. Acquiring
a vast
of differentowned
utilized in
a number
as at
16%a we
been entered
on known
our books
for decades. Entry into new industries is immediately available to the parent
our cost.
to construct
develop to
or an
market 10%
In having
2012 (and
in early 2013,
year end
we acquired
have successfully
to produce
of Marmon
and corporations
the same bizarre
accounting employed
The $700 
highly profitable organizations. Unfortunately, others discovered that the task of managing a
write-off we immediately incurred had no effect on earnings but did reduce book value

with 13th Edition Features
CPA Simulations
Hoyle 13e provides instructors and students access to CPA Simulations that correspond to several
key topics and chapters throughout the text. Students can complete these simulations online, allowing
them to practice advanced accounting concepts in a web-based interface that mimics the actual CPA
exam. There will be no hesitation or confusion when students sit for the real exam; they will know
exactly how to maneuver through the computerized test.

Consolidation of

38. On May 1, Burns Corporation acquired 100 percent of the outstanding ow
Corporation in exchange for $710,000 cash. At the acquisition date, Quig
were as follows:

LO 2-10

End-of-Chapter Materials

Book Va

As in previous editions, the end-of-chapter material remains a strength
text. The sheer numConfirmingCash
$  95,0
. . . . .the
. . . . . . students’
ber of questions, problems, and Internet assignments test and, therefore,Inventory.
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
knowledge of chapter concepts.
Building and equipment (net) . . . . . . . . . . . . . . . . . . . . .
Excel Spreadsheet Assignments extend specific problems and are located
the 13th
. . . . . . edition
64 Chapter 2
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resources page, with templated versions that can be provided
to students for
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Ificon
the consideration
for an
exceeds the total fair
of the acquired
assignments. An Excel
Long-term liabilities. . . spreadsheet
net assets, the residual amount is recognized in the consolidated financial statements as goodwill, an
Common stock ($5 par value). . . . . . . . . . . . . . . . . . . . .
intangible asset. When a bargain purchase occurs, individual assets and liabilities acquired continue
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . .
to be recorded at their fair values and a gain on bargain purchase is recognized.
Retained earnings.
. . . .master
. . . . . . . . . . . to
. . . . .pass
“Develop Your Skills”
4. Particular attention should be given to the recognition of intangible assets in business combinations.
Total liabilities and stockholders equity . . . . . . . . . . . .
An intangible
asset must be
recognized in an acquiring
financial statements if the assetAn
arisesicon indicates when
the CPA exam: Research,
from a legal or contractual right (e.g., trademarks, copyrights, artistic materials, royalty agreements).
recogdirects Quigley to seek additional financing for expansion throu
these skills are tested. If the intangible asset does not represent a legal or contractual right, the intangible will still beBurns
Confirming Pages

74 Chapter 2

Pushdown Accounting—
Date of Acquisition

Smallport Company Balance Sheet at January 1

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computers and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$   300,000
$ 2,870,000

Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (250,000)
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
if itpar
is. capable
separated from
Additional paid-in capitalnized
excess over
. . . . . . . . . . . of
. . . .being
Additional paid-in capitalrelationships,
from pushdown accounting
. . . . . . . technology).(2,500,000)
Retained earnings, 1/1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and equities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,870,000

firm (e.g., customer lists, noncontractual customer
issue. Consequently, Quigley will issue a set of financial statements sep
parent to support its request for debt and accompanying regulatory filing
pushdown accounting in order to show recent fair valuations for its assets
Prepare a separate acquisition-date balance sheet for Quigley Corp
Example: Pushdown Accounting
Time: 45
to the Exhibit
65 Minutes)
are the account balances of Miller Company and RichTo illustrate an application
of pushdown accounting,
we use
2.3 BigNet
and Smallport ComComprehensive
pany example presented
in this chapter.
Company 31.
fair accountvalues of Richmond Company’s assets and liabilities are
its acquisition-date separately reported balance sheet would appear as presented in Exhibit 2.10:
Illustration ing,Note
that the valuesalso
for each
asset and liability in Smallport’s separate balance sheet above are iden-

Develop Your Skills

tical to those reported in BigNet’s consolidated acquisition-date balance sheet.


Internal Reporting

Fair Values
Book Values

Pushdown accounting has several advantages for internal reporting. For example, it simplifies the con- Miller
solidation process. If the subsidiary enters the acquisition-date fair value allocations into its records, Company
worksheet Entry A (to recognize the allocations originating from the fair-value adjustments) is not
needed. Amortizations of the excess fair value allocation (see Chapter 3) would be incorporated Book
subsequent periods as well.
Despite some simplifications to the consolidation process, pushdown accounting does not address
the many issues in preparing consolidated financial statements that appear in subsequent chapters of
Cashto .be. seen
. . .how
. . .many
. . .acquired
. . . . .companies
. . . . . .will
. . choose
. . . . to. elect
. . . pushdown
$    600,000
this text. Therefore, it remains
accounting. For newly acquired subsidiaries that expect to issue new debt or eventually undergo an
. .investors
. . . . .with
. . .a .better
. . .understanding
. . . . . . . .of. the
. . company.
initial public offering, fair
values may provide
In summary, pushdown
accounting provides
its 1,100,000
. . . . . a. newly
. . . .acquired
. . . . .subsidiary
. . . . . .the. .option
. . . .to. revalue
assets and liabilities to acquisition-date fair values in its separately reported financial statements. This
. . . shares
. . . .to. the
. . public
. fol- 9,000,000
valuation option may be
useful when the
expects to offer the
lowing a period of planned improvements. Other benefits from pushdown accounting may arise when
Unpatented technology . . . . . . . . . . . . . . . . .
the subsidiary plans to issue debt and needs its separate financial statements to incorporate acquisitiondate fair values and previously
intangibles in
their standalone
financial reports.





Accounts payable . . . . . . . . . . . . . . . . . . . . . .


What is a business combination?
Describe the different
types of legal
arrangements that can take place to create a business combination.
What does the term consolidated financial statements mean?
Totals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $  7,800,000
Within the consolidation process, what is the purpose of a worksheet?
Jones Company obtains
all of the common
stock of Hudson,
by issuing
. .50,000
. . . .shares
. . . of
. its own
$ (2,000,000)
stock. Under these circumstances, why might the determination of a fair value for the consideration
transferred be difficult?
Common stock—$5 par value . . . . . . . . . . .
What is the accounting valuation basis for consolidating assets and liabilities in a business
Additional paid-in capital . . . . . . . . . . . . . . . .
. .expenses?
How should a parent
consolidate itsearnings,
subsidiary’s revenues
Morgan Company acquires
transRevenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
fers consideration more than the fair value of the company’s net assets. How should the payment in
. .the. .consolidation
. . . . . . . process?
. . . . . . . . . . . . . . . . . .     3,400,000
excess of fair valueExpenses
be accounted for in
Catron Corporation is having
Totals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (7,800,000)
Lambert, Inc., for cash. Because of Catron’s problems, Lambert is able to acquire this stock at less
than the fair value of the company’s net assets. How is this reduction in price accounted for within
the consolidation process?
Note: Parentheses indicate a credit balance.

LO 2-1

$ (600,000)

NaviNow Company agrees to pay $20 million in cash to the four former owne
its assets
of TrafficEye
and paten
of its own
on the nation’s
top 200
to combine the new technology with its existing global positioning syst
Sloane record the issuance of these shares?
substantial revenue increase.
all of contract,
the stock
of Molly,
of the
to pay additional
ers 100,000
upon achievement
of pay
will pay $8and
rison had to
a stoc
if revenues
from during
the combined
system exceed
over the
the creation
of this$100
to have
in costs
the astock
will value
The four former owners have also been offered employment contracts w
system integration and performance enhancement issues. The employment
of the
not to
primary employ
those of aequivalent
sharing component
over the next
(if the employees
with the
a. Combinations
a vehicle
to accelerate
estimates to have a current fair value of $2 million. The four former owners o
b. Cost savings can be achieved through elimination of du
stay on as employees of NaviNow for at least three years to help achieve the d
as consideration
as compensation expense to
d. Larger
firms in
likely toorfail.

2. Which of the following is the best theoretical justification f
a. In form the companies are one entity; in substance they
b. In form the companies are separate; in substance they ar
Additional Information (not reflected in the preceding figures)
c. In form
and substance
companies for
one entity.
∙ On December 31, Miller issues 50,000 shares of its $20 par
value common stock for all of the outskills
acquired Zelltech
which is primarily
known for
d. In form
and substance
the companies
are its
standing shares of Richmond Company.
but $250,000
a specialty
transponder under the trade name “Z-Tech
∙ As part of the acquisition agreement, Miller agrees to payLO
former owners of Richmond
3. manufactures
What is a statutory
if certain profit projections are realized over the next three years. Miller calculates the acquisitiona. A merger approved by the Securities and Exchange Com
date fair value of this contingency at $100,000.
b. An acquisition involving the purchase of both stock and
∙ In creating this combination, Miller pays $10,000 in stock issue costs and $20,000 in accounting and
c. A takeover completed within one year of the initial tend
legal fees.
d. A business combination in which only one company con
4. FASB ASC 805, “Business Combinations,” provides prin
LO 2-4
hoy44953_ch02_039-088.indd 87
acquired business. When the collective fair values of the
a. Miller’s stock has a fair value of $32 per share. Using the acquisition method:
liabilities assumed exceed the fair value of the consideratio
1. Prepare the necessary journal entries if Miller dissolves Richmond so it is no longer a separate
legal entity.
a. Recognized as an ordinary gain from a bargain purchase
2. Assume instead that Richmond will retain separate legal incorporation and maintain its own
b. Treated as negative goodwill to be amortized over the p



$ 200,000
$  600,000

$ (220,000)

LO 2-2



08/13/16 12:32 PM

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Brief Contents
Walkthrough  x
1. The Equity Method of Accounting for
Investments 1
2. Consolidation of Financial Information  39
3. Consolidations—Subsequent to the Date of
Acquisition 89
4. Consolidated Financial Statements and
Outside Ownership  155
5. Consolidated Financial Statements—
Intra-Entity Asset Transactions  211
6. Variable Interest Entities, Intra-Entity
Debt, Consolidated Cash Flows, and Other
Issues 261


Worldwide Accounting Diversity and
International Standards  533

12. Financial Reporting and the Securities and
Exchange Commission  589
13. Accounting for Legal Reorganizations and
Liquidations 615
14. Partnerships: Formation and Operation  663
15. Partnerships: Termination and
Liquidation 701
16. Accounting for State and Local Governments
(Part 1)  735
17. Accounting for State and Local Governments
(Part 2)  793

7. Consolidated Financial Statements—
Ownership Patterns and Income Taxes  319

18. Accounting and Reporting for Private Notfor-Profit Entities  849

8. Segment and Interim Reporting  363

19. Accounting for Estates and Trusts  895

9. Foreign Currency Transactions and Hedging
Foreign Exchange Risk  407

INDEX  929

10. Translation of Foreign Currency Financial
Statements 473


Walkthrough x
Chapter One
The Equity Method of Accounting for
Investments 1
The Reporting of Investments in Corporate Equity
Securities 1
Fair-Value Method  2
Cost Method (Investments in Equity Securities without
Readily Determinable Fair Values)  2
Consolidation of Financial Statements  3

Discussion Question: Did the Cost Method Invite
Earnings Manipulation?  4
Equity Method  4

International Accounting Standard 28—Investments in
Associates 5
Application of the Equity Method  5
Criteria for Utilizing the Equity Method  5
Accounting for an Investment—The Equity Method  7

Equity Method Accounting Procedures  9
Excess of Investment Cost over Book Value Acquired  9

Discussion Question: Does the Equity Method Really
Apply Here?  10
The Amortization Process  12

Equity Method—Additional Issues  14
Reporting a Change to the Equity Method  14
Reporting Investee’s Other Comprehensive Income and
Irregular Items  16
Reporting Investee Losses  16
Reporting the Sale of an Equity Investment  17

Deferral of Intra-Entity Gross Profits in Inventory  18
Downstream Sales of Inventory  19
Upstream Sales of Inventory  20

Financial Reporting Effects and Equity Method
Criticisms 21
Equity Method Reporting Effects  21
Criticisms of the Equity Method  22

Fair-Value Reporting for Equity Method Investments  23
Summary 24

Chapter Two
Consolidation of Financial Information  39
Expansion through Corporate Takeovers  40
Reasons for Firms to Combine  40
Facebook and WhatsApp  42
AT&T and DirecTV  42
MeadwestVaco and Rock-Tenn  43

Business Combinations, Control, and Consolidated
Financial Reporting  43
Business Combinations—Creating a Single Economic
Entity 44

Control—An Elusive Quality  45
Consolidation of Financial Information  46

Financial Reporting for Business Combinations  47
The Acquisition Method  47
Consideration Transferred for the Acquired Business  47
Contingent Consideration: An Additional Element of
Consideration Transferred  47
Assets Acquired and Liabilities Assumed  48
Goodwill and Gains on Bargain Purchases  49

Procedures for Consolidating Financial Information  49
Acquisition Method When Dissolution Takes Place  50
Related Costs of Business Combinations  54
The Acquisition Method When Separate Incorporation Is
Maintained 55

Acquisition-Date Fair-Value Allocations—
Additional Issues  60
Intangibles 60
Preexisting Goodwill on Subsidiary’s Books  61
Acquired In-Process Research and Development  62

Convergence between U.S. and International Accounting
Standards 63
Summary 63
Appendix A
Legacy Methods of Accounting for Business
Combinations 67
Appendix B
Pushdown Accounting  72

Chapter Three
Consolidations—Subsequent to the Date of
Acquisition 89
Consolidation—The Effects Created by the Passage of
Time 90
Consolidated Net Income Determination  90
The Parent’s Choice of Investment Accounting  90

Investment Accounting by the Acquiring Company  90
Internal Investment Accounting Alternatives—The
Equity Method, Initial Value Method, and Partial Equity
Method 91

Subsequent Consolidation—Investment Recorded by the
Equity Method  92
Acquisition Made during the Current Year  92
Determination of Consolidated Totals  94
Consolidation Worksheet  96
Consolidation Subsequent to Year of Acquisition—Equity
Method 98

Subsequent Consolidations—Investment Recorded Using
Initial Value or Partial Equity Method  103
Acquisition Made during the Current Year  103
Consolidation Subsequent to Year of Acquisition—Initial
Value and Partial Equity Methods  107

Discussion Question  111

xviii  Contents

Discussion Question: How Does a Company Really
Decide Which Investment Method to Apply?  112
Excess Fair Value Attributable to Subsidiary Long-Term
Debt: Post-Acquisition Procedures  113
Goodwill Impairment  115
Assigning Goodwill to Reporting Units  116
Qualitative Assessment Option  116
Testing Goodwill for Impairment  117
Illustration—Accounting and Reporting for a Goodwill
Impairment Loss  118
Reporting Units with Zero or Negative Carrying
Amounts 119
Goodwill Impairment Simplified—Proposed Accounting
Standards Update (ASU)  119
Comparisons with International Accounting Standards  120

Amortization and Impairment of Other Intangibles  121
Contingent Consideration  122
Accounting for Contingent Consideration in Business
Combinations 122

Summary 123
Private Company Accounting for Business
Combinations 127

Chapter Four
Consolidated Financial Statements and Outside
Ownership 155
Consolidated Financial Reporting in the Presence of a
Noncontrolling Interest  156
Subsidiary Acquisition-Date Fair Value in the Presence
of a Noncontrolling Interest  157

Discussion Question 158
Allocating Consolidated Net Income to the Parent
and Noncontrolling Interest  161

Partial Ownership Consolidations
(Acquisition Method)  162
Illustration—Partial Acquisition with No Control
Premium 162
Illustration—Partial Acquisition with Control Premium  170
Effects Created by Alternative Investment Methods  174

Revenue and Expense Reporting for Midyear
Acquisitions 175
Consolidating Postacquisition Subsidiary Revenue
and Expenses  175
Acquisition Following an Equity Method Investment  177

Step Acquisitions  177
Control Achieved in Steps—Acquisition Method  177
Example: Step Acquisition Resulting in Control—Acquisition
Method 177
Worksheet Consolidation for a Step Acquisition
(Acquisition Method)  179
Example: Step Acquisition Resulting after Control Is
Obtained 181

Discussion Question: Does GAAP Undervalue PostControl Stock Acquisitions?  182

Parent Company Sales of Subsidiary Stock—Acquisition
Method 182
Cost-Flow Assumptions  184
Accounting for Shares That Remain  184

Comparisons with International Accounting
Standards 184
Summary 185

Chapter Five
Consolidated Financial Statements—­
Intra-Entity Asset Transactions  211
Intra-Entity Inventory Transfers  212
The Sales and Purchases Accounts  212
Intra-Entity Gross Profit—Year of Transfer (Year 1)  213

Discussion Question: Earnings Management  214
Intra-Entity Gross Profit—Year Following Transfer
(Year 2)  215
Intra-Entity Gross Profit—Effect on Noncontrolling
Interest 217
Intra-Entity Inventory Transfers Summarized  218
Intra-Entity Inventory Transfers Illustrated: Parent Uses
Equity Method  219
Effects of Alternative Investment Methods on
Consolidation 227

Discussion Question: What Price Should We Charge
Ourselves? 230
Intra-Entity Land Transfers  232
Accounting for Land Transactions  232
Eliminating Intra-Entity Gains—Land Transfers  232
Recognizing the Effect on Noncontrolling Interest—Land
Transfers 234

Intra-Entity Transfer of Depreciable Assets  234
Deferral and Subsequent Recognition of Intra-Entity
Gains 235
Depreciable Asset Intra-Entity Transfers Illustrated  235
Years Following Downstream Intra-Entity Depreciable Asset
Transfers—Parent Uses Equity Method  238
Effect on Noncontrolling Interest—Depreciable Asset
Transfers 239

Summary 239

Chapter Six
Variable Interest Entities, Intra-Entity
Debt, Consolidated Cash Flows, and Other
Issues 261
Consolidation of Variable Interest Entities  261
What Is a VIE?  262
Consolidation of Variable Interest Entities  263
Procedures to Consolidate Variable Interest Entities  267
Consolidation of a Primary Beneficiary and VIE
Illustrated 268

Comparisons with International Accounting
Standards 271
Intra-Entity Debt Transactions  272

Contents  xix

Acquisition of Affiliate’s Debt from an Outside Party  273
Accounting for Intra-Entity Debt Transactions—Individual
Financial Records  273
Effects on Consolidation Process  275
Assignment of Retirement Gain or Loss  276
Intra-Entity Debt Transactions—Years Subsequent to
Effective Retirement  276

Discussion Question: Who Lost This $300,000?  277
Subsidiary Preferred Stock  279
Consolidated Statement of Cash Flows  281
Acquisition Period Statement of Cash Flows  282
Statement of Cash Flows in Periods Subsequent to
Acquisition 286

Consolidated Earnings per Share  286
Subsidiary Stock Transactions  288
Changes in Subsidiary Value—Stock Transactions  289
Subsidiary Stock Transactions—Illustrated  292

Summary 296

Chapter Seven
Consolidated Financial Statements—Ownership
Patterns and Income Taxes  319
Indirect Subsidiary Control  319
The Consolidation Process When Indirect Control Is
Present 320
Consolidation Process—Indirect Control  322

Indirect Subsidiary Control—Connecting
Affiliation 328
Mutual Ownership  330
Treasury Stock Approach  330
Mutual Ownership Illustrated  331

Income Tax Accounting for a Consolidated Entity  333
Affiliated Groups  334
Deferred Income Taxes  334
Consolidated Tax Returns—Illustration  335
Income Tax Expense Assignment  336
Filing of Separate Tax Returns  337
Deferred Tax on Undistributed Earnings—Illustrated  338
Separate Tax Returns Illustrated  339
Temporary Differences Generated by Business
Combinations 341
Consolidated Entities and Operating Loss
Carryforwards 342

Income Taxes and Consolidated
Entities—Comparisons with International Accounting
Standards 344
Summary 344

Chapter Eight
Segment and Interim Reporting  363
Segment Reporting  364
The Management Approach  364

Determination of Reportable Operating Segments  364
Quantitative Thresholds  365

Testing Procedures—Complete Illustration  366
The Revenue Test  366
The Profit or Loss Test  367
The Asset Test  368
Summary of Test Results  368

Other Guidelines  368
Information to Be Disclosed by Reportable Operating
Segments 370
Reconciliations to Consolidated Totals  372
Explanation of Measurement  373

Examples of Operating Segment Disclosures  373
Entitywide Information  375
Information about Products and Services  375
Information about Geographic Areas  375

Discussion Question: How Does a Company Determine
Whether a Foreign Country Is Material?  377
Information about Major Customers  378

International Financial Reporting Standard 8—Operating
Segments 379
Interim Reporting  379
Revenues 380
Inventory and Cost of Goods Sold  380
Other Costs and Expenses  381
Income Taxes  382
Change in Accounting Principle  383
Seasonal Items  384

Minimum Disclosures in Interim Reports  385
Segment Information in Interim Reports  386
International Accounting Standard 34—Interim Financial
Reporting 386
Summary 386

Chapter Nine
Foreign Currency Transactions and Hedging
Foreign Exchange Risk  407
Foreign Exchange Markets  408
Exchange Rate Mechanisms  408
Foreign Exchange Rates  408
Foreign Currency Forward Contracts  409
Foreign Currency Options  410

Foreign Currency Transactions  411
Accounting Issue  412
Balance Sheet Date before Date of Payment  413

International Accounting Standard 21—The Effects of
Changes in Foreign Exchange Rates  415
Foreign Currency Borrowing  415
Foreign Currency Loan  416

Hedges of Foreign Exchange Risk  417
Derivatives Accounting  417
Fundamental Requirement of Derivatives Accounting  418
Determination of Fair Value of Derivatives  418
Accounting for Changes in the Fair Value of
Derivatives 418

Hedge Accounting  419
Nature of the Hedged Risk  419

xx  Contents

Hedge Effectiveness  420
Hedge Documentation  420
Hedging Combinations  420

Hedges of Foreign Currency Denominated Assets and
Liabilities 423
Cash Flow Hedge  423
Fair Value Hedge  423

Forward Contract Used to Hedge a Foreign Currency
Denominated Asset  423
Forward Contract Designated as Cash Flow Hedge  425
Forward Contract Designated as Fair Value Hedge  428

Discussion Question: Do we have a Gain or what?  430
Cash Flow Hedge versus Fair Value Hedge  431

Foreign Currency Option Used to Hedge a Foreign
Currency Denominated Asset  432
Option Designated as Cash Flow Hedge  433
Option Designated as Fair Value Hedge  435

Hedges of Unrecognized Foreign Currency 
Firm Commitments  438
Forward Contract Used as Fair Value Hedge of a Firm
Commitment 438
Option Used as Fair Value Hedge of Firm Commitment  440

Hedge of Forecasted Foreign Currency Denominated
Transaction 443
Forward Contract Cash Flow Hedge of a Forecasted
Transaction 443
Option Designated as a Cash Flow Hedge
of a Forecasted Transaction  445

Use of Hedging Instruments  446
The Euro  448

International Financial Reporting Standard 9—Financial
Instruments 448
Summary 448

Chapter Ten
Translation of Foreign Currency Financial
Statements 473
Exchange Rates Used in Translation  474
Discussion Question: How Do We Report This?  475
Translation Adjustments  476
Balance Sheet Exposure  476

Translation Methods  477
Current Rate Method  477
Temporal Method  478
Translation of Retained Earnings  479

Complicating Aspects of the Temporal Method  480
Calculation of Cost of Goods Sold  480
Application of the Lower-of-Cost-or-Net-Realizable-Value
Rule 481
Property, Plant, and Equipment, Depreciation, and
Accumulated Depreciation  481
Gain or Loss on the Sale of an Asset  481

Treatment of Translation Adjustment  482
Authoritative Guidance  482
Determining the Appropriate Translation Method  483

Highly Inflationary Economies  484
Appropriate Exchange Rate  485

International Accounting Standard 21—The Effects of
Changes in Foreign Exchange Rates  486
The Translation Process Illustrated  487
Translation of Financial Statements—Current
Rate Method  489
Translation of the Balance Sheet  490
Translation of the Statement of Cash Flows  492

Remeasurement of Financial
Statements—Temporal Method  492
Remeasurement of the Income Statement  493
Remeasurement of the Statement of Cash Flows  495
Nonlocal Currency Balances  496

Comparison of the Results from Applying the Two
Different Methods  496
Underlying Valuation Method  497
Underlying Relationships  498

Hedging Balance Sheet Exposure  498
International Financial Reporting Standard 9—Financial
Instruments 499
Disclosures Related to Translation  499
Consolidation of a Foreign Subsidiary  500
Translation of Foreign Subsidiary Trial Balance  501
Determination of Balance in Investment Account—Equity
Method 502
Consolidation Worksheet  503

Summary 505

Chapter Eleven
Worldwide Accounting Diversity and
International Standards  533
Evidence of Accounting Diversity  533
Reasons for Accounting Diversity  536
Legal System  538
Taxation 538
Financing System  539
Inflation 539
Political and Economic Ties  539

Problems Caused by Diverse Accounting Practices  539
International Accounting Standards Committee  540
The IOSCO Agreement  541

International Accounting Standards Board
and IFRS  541
International Financial Reporting Standards (IFRS)  542
Use of IFRS  542
IFRS for SMEs  545

First-Time Adoption of IFRS  546
IFRS Accounting Policy Hierarchy  549

FASB–IASB Convergence  550
SEC Recognition of IFRS  552
IFRS Roadmap  553
A Possible Framework for Incorporating IFRS into U.S.
Financial Reporting  553
Relevance of IFRS for U.S. Accountants  554

Contents  xxi

Differences between IFRS and U.S. GAAP  554
Recognition Differences  554
Measurement Differences  556

Discussion Question: Which Accounting Method Really
Is Appropriate?  557
Classification, Presentation, and Disclosure
Differences 557
IAS 1, “Presentation of Financial Statements”  558
Conversion of IFRS Financial Statements to U.S. GAAP  558

Obstacles to Worldwide Comparability
of Financial Statements  564
Translation of IFRS into Other Languages  564
The Impact of Culture on Financial Reporting  564

Summary 565

Chapter Twelve
Financial Reporting and the Securities and
Exchange Commission  589
The Work of the Securities
and Exchange Commission  589
Purpose of the Federal Securities Laws  591
Full and Fair Disclosure  593

Corporate Accounting Scandals and the Sarbanes-Oxley
Act 595
Creation of the Public Company Accounting Oversight
Board 596
Registration of Public Accounting Firms  597

The SEC’s Authority and SEC Filings  598
The SEC’s Authority over Generally Accepted Accounting
Principles 598
Filings with the SEC  601
Electronic Data Gathering, Analysis, and Retrieval System
(EDGAR) 606

Discussion Question: Is the Disclosure Worth the
Cost? 607
Summary 608

Chapter Thirteen
Accounting for Legal Reorganizations and
Liquidations 615
An Overview of U. S. Bankruptcy Laws  616
Bankruptcy Reform Act of 1978  618

Discussion Question: What Do We Do Now?  622
Discussion Question: How Much Is That Building Really
Worth? 624
Statement of Financial Affairs Illustrated  625

Liquidation—Chapter 7 Bankruptcy  626
Role of the Trustee  628
Statement of Realization and Liquidation Illustrated  629
The Liquidation Basis of Accounting  631

Reorganization—Chapter 11 Bankruptcy  633
The Plan for Reorganization  633
Acceptance and Confirmation of Reorganization Plan  635

Financial Reporting during Reorganization  636
Financial Reporting for Companies Emerging from
Reorganization 638
Fresh Start Accounting Illustrated  639

Discussion Question: Is This the Real Purpose of the
Bankruptcy Laws?  641
Summary 642

Chapter Fourteen
Partnerships: Formation and Operation  663
Partnerships—Advantages and Disadvantages  664
Alternative Legal Forms  665
Subchapter S Corporation  665
Limited Partnerships (LPs)  666
Limited Liability Partnerships (LLPs)  666
Limited Liability Companies (LLCs)  666

Partnership Accounting—Capital Accounts  666
Articles of Partnership  667

Discussion Question: What Kind of Business Is This?  668
Accounting for Capital Contributions  668
Additional Capital Contributions and Withdrawals  671

Discussion Question: How Will the Profits Be Split?  672
Allocation of Income  672

Accounting for Partnership Dissolution  676
Dissolution—Admission of a New Partner  676
Dissolution—Withdrawal of a Partner  681

Summary 684

Chapter Fifteen
Partnerships: Termination and
Liquidation 701
Termination and Liquidation—Protecting
the Interests of All Parties  702
Termination and Liquidation Procedures Illustrated  702
Statement of Liquidation  705
Deficit Capital Balance—Contribution by Partner  705
Deficit Capital Balance—Loss to Remaining Partners  706

Discussion Question: What Happens If a Partner
Becomes Insolvent?  712
Installment Liquidations  713
Preliminary Distribution of Partnership Assets  713
Predistribution Plan  715

Summary 718

Chapter Sixteen
Accounting for State and Local Governments
(Part 1)  735
Introduction to the Financial Reporting for State and Local
Governments 736
Governmental Accounting—User Needs  737
Two Sets of Financial Statements  737
The Advantage of Reporting Two Sets of Financial
Statements 739

xxii  Contents

Internal Record-Keeping—Fund Accounting  740
Fund Accounting Classifications  741

Overview of State and Local Government Financial
Statements 745
Government-Wide Financial Statements  745
Fund Financial Statements  747

Accounting for Governmental Funds  751
The Importance of Budgets and the Recording of Budgetary
Entries 751
Encumbrances 754

Recognition of Expenditures and Revenues  755
Discussion Question: Is It an Asset or a Liability?  757
Recognition of Revenues—Overview  759
Derived Tax Revenues Such As Income Taxes and Sales
Taxes 759
Imposed Nonexchange Revenues Such As Property Taxes and
Fines 760
Government-Mandated Nonexchange Transactions and
Voluntary Nonexchange Transactions  761
Issuance of Bonds  762
Special Assessments  765
Interfund Transactions  766

Summary 770

Chapter Seventeen
Accounting for State and Local
Governments (Part 2)  793
The Hierarchy of U.S. Generally Accepted Accounting
Principles (GAAP) for State and Local Governments  793
Tax Abatement Disclosure  795

Solid Waste Landfill  796
Landfills—Government-Wide Financial Statements  797
Landfills—Fund Financial Statements  798

Defined Benefit Pension Plans  798
Works of Art and Historical Treasures  800
Infrastructure Assets and Depreciation  802
Comprehensive Annual Financial Report  803
The Primary Government and Component Units  804
Primary Government  804
Identifying Component Units  805
Reporting Component Units  806
Special Purpose Governments  807

Discussion Question: Is It Part of the County?  808
Acquisitions, Mergers, and Transfers
of Operations  808
Government-Wide and Fund
Financial Statements Illustrated  809
Statement of Net Position—Government-Wide Financial
Statements 810
Statement of Activities—Government-Wide Financial
Statements 811
Balance Sheet—Governmental Funds—Fund Financial
Statements 815
Statement of Revenues, Expenditures, and Other Changes
in Fund Balances—Governmental Funds—Fund Financial
Statements 817

Statement of Net Position—Proprietary Funds—
Fund Financial Statements  817
Statement of Revenues, Expenses, and Other Changes
in Net Position—Proprietary Funds—Fund Financial
Statements 821
Statement of Cash Flows—Proprietary Funds—Fund
Financial Statements  821

Reporting Public Colleges and Universities  824
Summary 830

Chapter Eighteen
Accounting and Reporting for Private
Not-for-Profit Entities  849
The Structure of Financial Reporting  850
Financial Statements for Private Not-for-Profit Entities  851
Statement of Financial Position  853
Statement of Activities  854
Statement of Functional Expenses  858

Accounting for Contributions  860
Discussion Question: Is This Really an Asset?  862
Reporting Works of Art and Historical Treasures  862
Holding Contributions for Others  863
Contributed Services  865
Exchange Transactions  866
Tax-Exempt Status  867
Mergers and Acquisitions  868

Transactions for a Private Not-for-Profit
Entity Illustrated 870
Transactions Reported on Statement of Activities  872

Discussion Question: Are Two Sets of GAAP Really
Needed for Colleges and Universities?  873
Accounting for Health Care Entities  873
Accounting for Patient Service Revenues  874

Summary 876

Chapter Nineteen
Accounting for Estates and Trusts  895
Accounting for an Estate  895
Administration of the Estate  896
Property Included in the Estate  897
Discovery of Claims against the Decedent  897
Protection for Remaining Family Members  898
Estate Distributions  898
Estate and Inheritance Taxes  900
The Distinction between Income and Principal  904
Recording of the Transactions of an Estate  905

Discussion Question: Is This Really an Asset?  908
Charge and Discharge Statement  909

Accounting for a Trust  910
Record-Keeping for a Trust Fund  913
Accounting for the Activities of a Trust  914

Summary 915

Index  929


The Equity Method
of Accounting for


he first several chapters of this text present the accounting and reporting for investment activities of businesses. The focus is on investments
when one firm possesses either significant influence or control over

another through ownership of voting shares. When one firm owns enough
voting shares to be able to affect the decisions of another, accounting for

Learning Objectives
After studying this chapter, you
should be able to:
LO 1-1

the investment can become challenging and complex. The source of such
complexities typically stems from the fact that transactions among the firms
affiliated through ownership cannot be considered independent, arm’s-length

LO 1-2

transactions. As in many matters relating to financial reporting, we look to
transactions with outside parties to provide a basis for accounting valuation.
When firms are affiliated through a common set of owners, measurements
that recognize the relationships among the firms help to provide objectivity in

LO 1-3

financial reporting.

The Reporting of Investments in
Corporate Equity Securities
In its recent annual report, The Coca-Cola Company describes its 28 percent
investment in Coca-Cola FEMSA, a Mexican bottling company with operations throughout much of Latin America. The Coca-Cola Company uses the
equity method to account for several of its bottling company investments,
including Coca-Cola FEMSA. The Coca-Cola Company states,
We use the equity method to account for investments in companies, if our
investment provides us with the ability to exercise significant influence over
operating and financial policies of the investee. Our consolidated net income
includes our Company’s proportionate share of the net income or loss of these
Our judgment regarding the level of influence over each equity method
investment includes considering key factors such as our ownership interest,
representation on the board of directors, participation in policy-making decisions and material intercompany transactions.

Such information is hardly unusual in the business world; corporate investors frequently acquire ownership shares of both domestic and foreign businesses. These investments can range from the purchase of a few shares to the
acquisition of 100 percent control. Although purchases of corporate equity
securities (such as the ones made by Coca-Cola) are not uncommon, they pose
a considerable number of financial reporting issues because a close relationship has been established without the investor gaining actual control. These
issues are currently addressed by the equity method. This chapter deals with
accounting for stock investments that fall under the application of this method.

LO 1-4

LO 1-5

LO 1-6

LO 1-7

Describe in general the
various methods of accounting
for an investment in equity
shares of another company.
Identify the sole criterion for
applying the equity method
of accounting and know the
guidelines to assess whether
the criterion is met.
Describe the financial
reporting for equity method
investments and prepare
basic equity method journal
entries for an investor.
Allocate the cost of an equity
method investment and
compute amortization expense
to match revenues recognized
from the investment to the
excess of investor cost over
investee book value.
Understand the financial
reporting consequences for:
a. A change to the equity
b. Investee’s other
comprehensive income.
c. Investee losses.
d. Sales of equity method
Describe the rationale and
computations to defer the
investor’s share of gross
profits on intra-entity inventory
sales until the goods are either
consumed by the owner or
sold to outside parties.
Explain the rationale and
reporting implications of
fair-value accounting for
investments otherwise
accounted for by the equity


2  Chapter 1
LO 1-1
Describe in general the various
methods of accounting for an
investment in equity shares of
another company.

Generally accepted accounting principles (GAAP) recognize four different approaches to the
financial reporting of investments in corporate equity securities:
1. Fair-value method.
2. Cost method for equity securities without readily determinable fair values.
3. Consolidation of financial statements.
4. Equity method.
The financial statement reporting for a particular investment depends primarily on the
degree of influence that the investor (stockholder) has over the investee, a factor most
often indicated by the relative size of ownership.1 Because voting power typically accompanies ownership of equity shares, influence increases with the relative size of ownership.
The resulting influence can be very little, a significant amount, or, in some cases, complete control.

Fair-Value Method
In many instances, an investor possesses only a small percentage of an investee company’s
outstanding stock, perhaps only a few shares. Because of the limited level of ownership, the
investor cannot expect to significantly affect the investee’s operations or decision making.
These shares are bought in anticipation of cash dividends or in appreciation of stock market
values. Such investments are recorded at cost and periodically adjusted to fair value according to the Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic 321, “Investments—Equity Securities.”
Fair value is defined by the ASC (Master Glossary) as the “price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date.” For most investments in equity securities, quoted stock market
prices represent fair values.
Because a full coverage of limited ownership investments in equity securities is presented
in intermediate accounting textbooks, only the following basic principles are noted here:
∙ Initial investments in equity securities are recorded at cost and subsequently adjusted to
fair value if fair value is readily determinable (typically by reference to market value);
otherwise, the investment remains at cost.
∙ Changes in the fair values of equity securities during a reporting period are recognized as
∙ Dividends declared on the equity securities are recognized as income.
The above procedures are followed for equity security investments (with readily determinable
fair values) when the owner possesses neither significant influence nor control.

Cost Method (Investments in Equity Securities without Readily
Determinable Fair Values)
When the fair value of an investment in equity securities is not readily determinable, and the
investment provides neither significant influence nor control, the investment may be measured at cost. Such investments sometimes can be found in ownership shares of firms that are
not publicly traded or experience only infrequent trades.

The relative size of ownership is most often the key factor in assessing one company’s degree of influence over another. However, as discussed later in this chapter, other factors (e.g., contractual relationships
between firms) can also provide influence or control over firms regardless of the percentage of shares
FASB Accounting Standards Update (ASU) No. 2016-01, Financial Instruments—Overall, requires equity
investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income,
unless fair values are not readily determinable. Thus, the previous available-for-sale category with fair value
changes recorded in other comprehensive income will no longer be available. The ASU is effective for fiscal
years beginning after December 15, 2017, with early adoption permitted.

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