中央财经大学高级财务会计书后答案.docx
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中央财经大学高级财务会计书后答案.docx
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中央财经大学高级财务会计书后答案
Chapter1
theequitymethodofaccountingforinvestments
ChapterOutline
I.Threemethodsareprincipallyusedtoaccountforaninvestmentinequitysecurities.
A.Fair-valuemethod:
appliedbyaninvestorwhenonlyasmallpercentageofacompany’svotingstockisheld.
1.Incomeisrecognizedwhendividendsaredeclared.
2.Portfoliosarereportedatmarketvalue.Ifmarketvaluesareunavailable,investmentisreportedatcost.
B.Consolidation:
whenonefirmcontrolsanother(e.g.,whenaparenthasamajorityinterestinthevotingstockofasubsidiaryorcontrolthroughvariableinterests(FIN46R),theirfinancialstatementsareconsolidatedandreportedforthecombinedentity.
C.Equitymethod:
appliedwhentheinvestorhastheabilitytoexercisesignificantinfluenceoveroperatingandfinancialpoliciesoftheinvestee.
1.Abilitytosignificantlyinfluenceinvesteeisindicatedbyseveralfactorsincludingrepresentationontheboardofdirectors,participationinpolicy-making,etc.
2.AccordingtoaguidelineestablishedbytheAccountingPrinciplesBoard,theequitymethodispresumedtobeapplicableif20to50percentoftheoutstandingvotingstockoftheinvesteeisheldbytheinvestor.SFAS159,TheFairValueOptionforFinancialAssetsandFinancialLiabilities(effective2008)allowsfirmstoelecttousefairvalue
II.Accountingforaninvestment:
theequitymethod
A.Theinvestmentaccountisadjustedbytheinvestortoreflectallchangesintheequityoftheinvesteecompany.
B.Incomeisaccruedbytheinvestorassoonasitisearnedbytheinvestee.
C.DividendsdeclaredbytheinvesteecreateareductioninthecarryingamountoftheInvestmentaccount.
III.Specialaccountingproceduresusedintheapplicationoftheequitymethod
A.Reportingachangetotheequitymethodwhentheabilitytosignificantlyinfluenceaninvesteeisachievedthroughaseriesofacquisitions.
1.Initialpurchase(s)willbeaccountedforbymeansofthefair-valuemethod(oratcost)untiltheabilitytosignificantlyinfluenceisattained.
2.Atthepointintimethattheequitymethodbecomesapplicable,aretroactiveadjustmentismadebytheinvestortoconvertallpreviouslyreportedfigurestotheequitymethodbasedonpercentageofsharesownedinthoseperiods.
3.Thisrestatementestablishescomparabilitybetweenthefinancialstatementsofallyears.
B.
Investeeincomefromotherthancontinuingoperations
1.Incomeitemssuchasextraordinarygainsandlossesandpriorperiodadjustmentsthatarereportedseparatelybytheinvesteeshouldbeshowninthesamemannerbytheinvestor.
2.Thematerialityofthisincomeelement(asitaffectstheinvestor)continuestobeacriterionforthisseparatedisclosure.
C.Investeelosses
1.Lossesreportedbytheinvesteecreatecorrespondinglossesfortheinvestor.
2.Apermanentdeclineinthemarketvalueofaninvestee’sstockshouldalsoberecognizedimmediatelybytheinvestor.
3.Investeelossescanpossiblyreducethecarryingvalueoftheinvestmentaccounttoazerobalance.Atthatpoint,theequitymethodceasestobeapplicableandthefair-valuemethodissubsequentlyused.
D.Reportingthesaleofanequityinvestment
1.Theequitymethodisconsistentlyapplieduntilthedateofdisposaltoestablishtheproperbookvalue.
2.Followingthesale,theequitymethodcontinuestobeappropriateifenoughsharesarestillheldtomaintaintheinvestor’sabilitytosignificantlyinfluencetheinvestee.Ifthatabilityhasbeenlost,thefair-valuemethodissubsequentlyused.
IV.Excesscostofinvestmentoverbookvalueacquired
A.Thepricepaidbyaninvestorforequitysecuritiescanvarysignificantlyfromtheunderlyingbookvalueoftheinvesteecompanyprimarilybecausethehistoricalcostbasedaccountingmodeldoesnotkeeptrackofchangesinafirm’smarketvalue.
B.Paymentsmadeinexcessofunderlyingbookvaluecansometimesbeidentifiedwithspecificinvesteeaccountssuchasinventoryorequipment.
C.Anextraacquisitionpricecanalsobeassignedtoanticipatedbenefitsthatareexpectedtobederivedfromtheinvestment.Foraccountingpurposes,theseamountsarepresumedtoreflectanintangibleassetreferredtoasgoodwill.Goodwilliscalculatedasanyexcesspaymentthatisnotattributabletospecificaccounts.Fortheyear2002andbeyond,goodwillisnolongeramortized.
V.Deferralofunrealizedgainsininventory
A.Gainsderivedfromintercompanytransactionsarenotconsideredcompletelyearneduntilthetransferredgoodsareeitherconsumedorresoldtounrelatedparties.
B.Downstreamsalesofinventory
1.“Downstream”referstotransfersmadebytheinvestortotheinvestee.
2.Intercompanygainsfromsalesareinitiallydeferredundertheequitymethodandthenrecognizedasincomeatthetimeoftheinventory’seventualdisposal.
3.Theamountofgaintobedeferredistheinvestor’sownershippercentagemultipliedbythemarkuponthemerchandiseremainingattheendoftheyear.
C.Upstreamsalesofinventory
1.“Upstream”referstotransfersmadebytheinvesteetotheinvestor.
2.Undertheequitymethod,thedeferralprocessforunrealizedgainsisidenticalforupstreamanddownstreamtransfers.TheproceduresareseparatelyidentifiedinChapterOnebecausethehandlingdoesvarywithintheconsolidationprocess.
LearningObjectives
HavingcompletedChapterOne,"TheEquityMethodofAccountingforInvestments,"studentsshouldbeabletofulfilleachofthefollowinglearningobjectives:
1.Identifythesolecriterionforapplyingtheequitymethodofaccounting.
2.Understandthepurposeofthe20to50percentguidelineasitistobeusedbyaninvestor.
3.Preparethebasicequitymethodjournalentriesforaninvestor.
4.Discussthetheoreticalproblemsassociatedwithaninvestor'saccrualofequityincomewherenoassethasyetbeenreceivedfromtheinvestmentandmaynotbereceivedintheforeseeablefuture.
5.Understandtheappropriatemeansofrecordingachangefromthemarketvaluemethodtotheequitymethodandtherationaleforthishandling.
6.Identifytheproperreportingtobeusedinapplyingtheequitymethodwhenaninvesteeisdisclosingitemssuchasextraordinarygainsandlossesorpriorperiodadjustments.
7.Knowthatanypermanentdeclineinthefairmarketvalueofaninvestee'sstockmustbeimmediatelyreflectedinthefinancialrecordsoftheinvestor.
8.Recordthesaleofanequityinvestmentandidentifytheaccountingmethodtobeappliedtoanyremainingsharesthataresubsequentlyheld.
9.Allocatethepricepaidtopurchaseaninvestmentsothatadeterminationcanbemadeofamountsattributedtospecificinvesteeaccountsand/orgoodwill.
10.Computetheannualamortizationtoberecognizedonanyexcesspaymentsmadebytheinvestorandpreparethejournalentrytorecordthisexpense.
11.Understandtherationalefordeferringunrealizedgainsonintercompanytransfersuntilthetimeperiodinwhichthegoodsareeitherconsumedorsoldtooutsideparties.
12.Computetheamountofanintercompanygainthatisconsideredtobeunrealizedandmakethejournalentriestofirstdeferthegainandthenrecognizeitintheappropriatetimeperiod.
13.Identifythedifferencebetweenupstreamanddownstreamtransfers.
AnswerstoDiscussionQuestions
Discussionquestionsareincludedwithinthistextbooktostimulatestudentthoughtanddiscussion.Thesequestionsarealsodesignedtoforcethestudentstoconsiderrelevantissuesthatmightotherwisebeoverlooked.Someofthesequestionsmaybeaddressedbytheinstructorinclasstoprovideanoutletforstudentdiscussion.Studentsshouldbeencouragedtobeginbydefiningtheactualproblemorproblemsineachcase.Next,officialaccountingpronouncementsorotherrelevantliteraturecanbeconsultedasapreliminarystepinarrivingatlogicalactions.Manytimes,acarefulreadingofthestatementscreatedbytheFASB,GASB,APB,etc.,willprovideauthoritativeanswers.
Unfortunately,inaccounting,definitiveresolutionstofinancialreportingquestionsarenotalwaysavailable.Studentsoftenseemtobelievethatallaccountingissueshavebeenresolvedinthepastsothataccountingeducationisonlyamatteroflearningtoapplyhistoricallyprescribedprocedures.However,inactualpractice,theonlyrealanswerisoftentheonethatprovidesthefairestrepresentationofthetransactionsbeingrecorded.Ifanauthoritativesolutionisnotavailable,studentsshouldbedirectedtolistalloftheissuesinvolvedandtheconsequencesofpossiblealternativeactions.Thevariousfactorsbeingpresentedshouldthenbeweighedasameansofproducingaviablesolution.
Thesediscussionquestionshavebeenproducedsothatstudentsmustuseresearchskillsaswellastheirownreasoningtoderiveresolutionsforavarietyofissuesthatgobeyondthepurelymechanicalelementsofaccounting.
DoestheEquityMethodReallyApplyHere?
Thediscussionpresentedinthecasebetweenthetwoaccountantsislimitedtothereasonfortheinvestmentacquisitionandthecurrentpercentageofownership.Instead,theyshouldbeexaminingtheactualinteractionthatcurrentlyexistsbetweenthetwocompanies.Althoughtheabilitytoexercisesignificantinfluenceoveroperatingandfinancialpoliciesappearstobearathervaguecriterion,APBOpinion18,"TheEquityMethodofAccountingforInvestmentsinCommonStock,"clearlyspecifiesactualeventsthatindicatethislevelofauthority(paragraph17):
Abilitytoexercisethatinfluencemaybeindicatedinseveralways,suchasrepresentationontheboardofdirectors,participationinpolicymakingprocesses,materialintercompanytransactions,interchangeo
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