Advanced Accounting, 14th Edition PDF by Joe B Hoyle, Thomas F Schaefer and Timothy S Doupnik


Advanced Accounting, Fourteenth Edition

By Joe B. Hoyle, Thomas F. Schaefer and Timothy S. Doupnik

Advanced Accounting, 14th Edition


Walkthrough x

Chapter One

The Equity Method of Accounting for Investments 1

Why Do Business Firms Invest in the Equity Shares of Other Business Firms? 1

The Reporting of Investments in Corporate Equity Securities 2

Fair-Value Method 2

Cost Method (Investments in Equity Securities without Readily Determinable Fair Values) 3

Consolidation of Financial Statements 3

Equity Method 4

Discussion Question: Did the Cost Method Invite Earnings Manipulation? 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

International Accounting Standard 28—Investments in Associates 14

Equity Method—Additional Issues 14

Reporting a Change to the Equity Method 15

Reporting Investee’s Other Comprehensive Income and Irregular Items 16

Reporting Investee Losses 17

Reporting the Sale of an Equity Investment 18

Deferral of Intra-Entity Gross Profits in Inventory 19

Downstream Sales of Inventory 20

Upstream Sales of Inventory 20

Financial Reporting Effects and Equity Method Criticisms 22

Equity Method Reporting Effects 22

Criticisms of the Equity Method 23

Fair-Value Reporting for Equity Method Investments 23

Summary 25

Chapter Two

Consolidation of Financial Information 39

Expansion through Corporate Takeovers 40

Reasons for Firms to Combine 40

Amazon and Whole Foods Market 42 and MuleSoft 42

Tesla and Grohmann Engineering 43

Business Combinations, Control, and Consolidated Financial Reporting 43

Business Combinations—Creating a Single Economic Entity 43

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 Acquired Firm’s Books 61

Acquired In-Process Research and Development 62

Convergence between U.S. and International Accounting Standards 63

Discussion Question: What if an Acquired Entity is Not a Business? 64

Summary 64

Appendix A

Legacy Methods of Accounting for Business Combinations 68

Appendix B

Pushdown Accounting 73

Chapter Three

Consolidations—Subsequent to the Date of Acquisition 91

Consolidation—The Effects Created by the Passage of Time 92

Consolidated Net Income Determination 92

The Parent’s Choice of Investment Accounting 92

Investment Accounting by the Acquiring Company 92

Internal Investment Accounting Alternatives—The Equity Method, Initial Value Method, and Partial Equity Method 93

Discussion Question: How Does A Company Really Decide Which Investment Method to Apply? 94

Subsequent Consolidation—Investment Recorded by the Equity Method 95

Acquisition Made during the Current Year 95

Determination of Consolidated Totals 98

Consolidation Worksheet 99

Consolidation Subsequent to Year of Acquisition—Equity Method 101

Subsequent Consolidations—Investment Recorded Using Initial Value or Partial Equity Method 106

Acquisition Made during the Current Year 106

Consolidation Subsequent to Year of Acquisition—Initial Value and Partial Equity Methods 110

Discussion Question 114

Excess Fair Value Attributable to Subsidiary Long-Term Debt: Postacquisition Procedures 116

Goodwill Impairment 117

Assigning Goodwill to Reporting Units 118

Qualitative Assessment Option 119

Testing Goodwill for Impairment 120

Illustration—Accounting and Reporting for a Goodwill Impairment Loss 120

Comparisons with International Accounting Standards 121

Amortization and Impairment of Other Intangibles 122

Contingent Consideration—Postcombination 123

Accounting for Contingent Consideration in Periods Subsequent to a Business Combination 123

Summary 125


Private Company Accounting for Business Combinations 129

Chapter Four

Consolidated Financial Statements and Outside Ownership 157

Consolidated Financial Reporting in the Presence of a Noncontrolling Interest 158

Subsidiary Acquisition-Date Fair Value in the Presence of a Noncontrolling Interest 159

Discussion Question 160

Control Premiums, Noncontrolling Interest Valuation, and Goodwill 161

Allocating Consolidated Net Income to the Parent and Noncontrolling Interest 163

Partial Ownership Consolidations (Acquisition Method) 164

Illustration—Partial Acquisition with No Control Premium 165

Illustration—Partial Acquisition with Control Premium 174

Effects Created by Alternative Investment Methods 177

Revenue and Expense Reporting for Midyear Acquisitions 177

Consolidating Postacquisition Subsidiary Revenue and Expenses 177

Acquisition Following an Equity Method Investment 179

Step Acquisitions 179

Control Achieved in Steps—Acquisition Method 180

Example: Step Acquisition Resulting in Control—Acquisition Method 180

Worksheet Consolidation for a Step Acquisition (Acquisition Method) 182

Example: Step Acquisition Resulting after Control Is Obtained 182

Discussion Question: Does GAAP Undervalue Post-Control Stock Acquisitions? 184

Parent Company Sales of Subsidiary Stock—Acquisition Method 185

Sale of Subsidiary Shares with Control Maintained 185

Sale of Subsidiary Shares with Control Lost 186

Cost-Flow Assumptions 186

Accounting for Shares That Remain 187

Comparisons with International Accounting Standards 187

Summary 188

Chapter Five

Consolidated Financial Statements— Intra-Entity Asset Transactions 213

Intra-Entity Inventory Transfers 214

The Sales and Purchases Accounts 214

Intra-Entity Gross Profit—Year of Transfer (Year 1) 215

Discussion Question: Earnings Management 216

Intra-Entity Gross Profit—Year Following Transfer (Year 2) 217

Intra-Entity Gross Profit—Effect on Noncontrolling Interest 219

Intra-Entity Inventory Transfers Summarized 221

Intra-Entity Inventory Transfers Illustrated: Parent Uses Equity Method 221

Effects of Alternative Investment Methods on Consolidation 229

Discussion Question: What Price Should We Charge Ourselves? 232

Intra-Entity Land Transfers 234

Accounting for Land Transactions 234

Eliminating Intra-Entity Gains—Land Transfers 234

Recognizing the Effect on Noncontrolling Interest—Land Transfers 236

Intra-Entity Transfer of Depreciable Assets 236

Deferral and Subsequent Recognition of Intra-Entity Gains 237

Depreciable Asset Intra-Entity Transfers Illustrated 237

Years Following Downstream Intra-Entity Depreciable Asset Transfers—Parent Uses Equity Method 240

Effect on Noncontrolling Interest—Depreciable Asset Transfers 241

Summary 241

Chapter Six

Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues 263

Consolidation of Variable Interest Entities 263

What Is a VIE? 264

Consolidation of Variable Interest Entities 265

Procedures to Consolidate Variable Interest Entities 269

Consolidation of a Primary Beneficiary and VIE Illustrated 270

Comparisons with International Accounting Standards 274

Intra-Entity Debt Transactions 274

Acquisition of Affiliate’s Debt from an Outside Party 275

Accounting for Intra-Entity Debt Transactions—Individual Financial Records 276

Effects on Consolidation Process 278

Assignment of Retirement Gain or Loss 278

Intra-Entity Debt Transactions—Years Subsequent to Effective Retirement 278

Discussion Question: Who Lost This $300,000? 279

Subsidiary Preferred Stock 282

Consolidated Statement of Cash Flows 284

Acquisition Period Statement of Cash Flows 285

Statement of Cash Flows in Periods Subsequent to Acquisition 288

Consolidated Earnings per Share 288

Subsidiary Stock Transactions 291

Changes in Subsidiary Value—Stock Transactions 292

Subsidiary Stock Transactions—Illustrated 295

Summary 299

Chapter Seven

Consolidated Financial Statements—Ownership Patterns and Income Taxes 321

Indirect Subsidiary Control 321

The Consolidation Process When Indirect Control Is Present 322

Consolidation Process—Indirect Control 324

Indirect Subsidiary Control—Connecting Affiliation 330

Mutual Ownership 332

Treasury Stock Approach 332

Mutual Ownership Illustrated 333

Income Tax Accounting for a Consolidated Entity 335

Affiliated Groups 336

Deferred Income Taxes 336

Consolidated Tax Returns—Illustration 338

Income Tax Expense Assignment 338

Filing of Separate Tax Returns 339

Deferred Tax on Undistributed Earnings—Illustrated 340

Separate Tax Returns Illustrated 341

Temporary Differences Generated by Business Combinations 343

Consolidated Entities and Operating Loss Carryforwards 344

Income Taxes and Consolidated Entities—Comparisons with International Accounting Standards 345

Intra-Entity Inventory Tax Effects 346

Intra-Entity Tax Effects Other than Inventory 346

Summary 346

Chapter Eight

Segment and Interim Reporting 365

Segment Reporting 366

The Management Approach 366

Determination of Reportable Operating Segments 366

Quantitative Thresholds 367

Testing Procedures—Complete Illustration 368

The Revenue Test 368

The Profit or Loss Test 368

The Asset Test 370

Summary of Test Results 370

Other Guidelines 371

Information to Be Disclosed by Reportable Operating Segments 373

Reconciliations to Consolidated Totals 374

Explanation of Measurement 375

Examples of Operating Segment Disclosures 375

Entitywide Information 377

Information about Products and Services 377

Information about Geographic Areas 377

Discussion Question: How Does a Company Determine Whether a Foreign Country is Material? 379

Information about Major Customers 380

International Financial Reporting Standard 8— Operating Segments 381

Interim Reporting 381

Revenues 382

Inventory and Cost of Goods Sold 382

Other Costs and Expenses 383

Income Taxes 384

Change in Accounting Principle 385

Seasonal Items 386

Minimum Disclosures in Interim Reports 387

Segment Information in Interim Reports 387

International Accounting Standard 34—Interim Financial Reporting 388

Summary 389

Chapter Nine

Foreign Currency Transactions and Hedging Foreign Exchange Risk 409

Foreign Exchange Markets 410

Exchange Rate Mechanisms 410

Foreign Exchange Rates 410

Foreign Currency Forward Contracts 411

Foreign Currency Options 412

Foreign Currency Transactions 413

Accounting Issue 413

Balance Sheet Date before Date of Payment 415

International Accounting Standard 21—The Effects of Changes in Foreign Exchange Rates 416

Foreign Currency Borrowing 416

Foreign Currency Loan 418

Hedges of Foreign Exchange Risk 418

Derivatives Accounting 419

Fundamental Requirement of Derivatives Accounting 419

Determination of Fair Value of Derivatives 419

Accounting for Changes in the Fair Value of Derivatives 421

Hedge Accounting 421

Nature of the Hedged Risk 421

Hedge Effectiveness 422

Hedge Documentation 423

Hedging Combinations 423

Hedges of Foreign Currency–Denominated Assets and Liabilities 424

Cash Flow Hedge 424

Fair Value Hedge 424

Forward Contract Hedge of a Foreign Currency– Denominated Asset 428

Forward Contract Designated as Cash Flow Hedge 430

Forward Contract Designated as Fair Value Hedge 433

Discussion Question: Do We Have a Gain or What? 435

Option Hedge of a Foreign Currency–Denominated Asset 436

Option Designated as Cash Flow Hedge 437

Option Designated as Fair Value Hedge 439

Hedge of Unrecognized Foreign Currency Firm Commitment 442

Forward Contract Fair Value Hedge of a Firm Commitment 442

Option Fair Value Hedge of Firm Commitment 444

Hedge of Forecasted Foreign Currency Transaction 447

Forward Contract Cash Flow Hedge of a Forecasted Transaction 447

Option Cash Flow Hedge of a Forecasted Transaction 449

Use of Hedging Instruments 451

International Financial Reporting Standard 9— Financial Instruments 452

Summary 452

Chapter Ten

Translation of Foreign Currency Financial Statements 479

Exchange Rates Used in Translation 480

Discussion Question: How Do We Report This? 481

Translation Adjustments 482

Balance Sheet Exposure 482

Translation Methods 483

Current Rate Method 483

Temporal Method 484

Translation of Retained Earnings 485

Complicating Aspects of the Temporal Method 486

Calculation of Cost of Goods Sold 486

Application of the Lower-of-Cost-or-Net-Realizable-Value Rule 487

Property, Plant, and Equipment, Depreciation, and Accumulated Depreciation 487

Gain or Loss on the Sale of an Asset 487

Treatment of Translation Adjustment 488

Authoritative Guidance 488

Determining the Appropriate Translation Method 489

Highly Inflationary Economies 490

Appropriate Exchange Rate 491

International Accounting Standard 21—The Effects of Changes in Foreign Exchange Rates 492

The Translation Process Illustrated 493

Translation of Financial Statements—Current Rate Method 495

Translation of the Balance Sheet 496

Translation of the Statement of Cash Flows 498

Remeasurement of Financial Statements—Temporal Method 499

Remeasurement of the Income Statement 499

Remeasurement of the Statement of Cash Flows 501

Nonlocal Currency Balances 501

Comparison of the Results from Applying the Two Different Methods 503

Underlying Valuation Method 503

Underlying Relationships 504

Hedging Balance Sheet Exposure 504

Accounting for Hedges of Remeasurement-Related Balance Sheet Exposure 505

Accounting for Hedges of Translation-Related Balance Sheet Exposure 505

International Financial Reporting Standard 9– Financial Instruments 507

Disclosures Related to Translation 507

Consolidation of a Foreign Subsidiary 508

Translation of Foreign Subsidiary Trial Balance 509

Determination of Balance in Investment Account—Equity Method 510

Consolidation Worksheet 510

Summary 512

Chapter Eleven

Worldwide Accounting Diversity and International Standards 539

Evidence of Accounting Diversity 539

Reasons for Accounting Diversity 543

Legal System 544

Taxation 545

Financing System 545

Inflation 545

Political and Economic Ties 545

Problems Caused by Diverse Accounting Practices 546

International Accounting Standards Committee 547

The IOSCO Agreement 547

International Accounting Standards Board and IFRS 547

International Financial Reporting Standards (IFRS) 548

Use of IFRS Standards 549

IFRS for SMEs 551

First-Time Adoption of IFRS 552

IFRS Accounting Policy Hierarchy 555

FASB–IASB Convergence 556

SEC Recognition of IFRS 558

IFRS Roadmap 559

A Possible Framework for Incorporating IFRS into U.S. Financial Reporting 559

Relevance of IFRS for U.S. Accountants 560

Differences between IFRS and U.S. GAAP 560

Recognition Differences 562

Measurement Differences 562

Discussion Question: Which Accounting Method Really is Appropriate? 563

Classification, Presentation, and Disclosure Differences 563

IAS 1, “Presentation of Financial Statements” 564

Conversion of IFRS Financial Statements to U.S. GAAP 564

Obstacles to Worldwide Comparability of Financial Statements 570

Translation of IFRS into Other Languages 570

The Impact of Culture on Financial Reporting 570

Summary 571

Chapter Twelve

Financial Reporting and the Securities and Exchange Commission 593

The Work of the Securities and Exchange Commission 593

Purpose of the Federal Securities Laws 595

Full and Fair Disclosure 596

Corporate Accounting Scandals and the Sarbanes– Oxley Act 599

Creation of the Public Company Accounting Oversight Board 600

Registration of Public Accounting Firms 600

The SEC’s Authority and SEC Filings 602

The SEC’s Authority over Generally Accepted Accounting Principles 602

Filings with the SEC 606

Discussion Question: Is the Disclosure Worth the Cost? 611

Electronic Data Gathering, Analysis, and Retrieval System (EDGAR) 611

Summary 612

Chapter Thirteen

Accounting for Legal Reorganizations and Liquidations 619

Overview of Bankruptcy in the United States 620

U.S. Bankruptcy Laws 622

Discussion Question: What Do We Do Now? 626

Discussion Question: How Much is That Building Really Worth? 627

Statement of Financial Affairs Illustrated 628

Liquidation—Chapter 7 Bankruptcy 631

Role of the Trustee 631

Statement of Realization and Liquidation Illustrated 632

The Liquidation Basis of Accounting 635

Reorganization—Chapter 11 Bankruptcy 637

The Plan for Reorganization 637

Acceptance and Confirmation of Reorganization Plan 639

Financial Reporting during Reorganization 640

Financial Reporting for Companies Emerging from Reorganization 642

Fresh Start Accounting Illustrated 643

Discussion Question: Is This the Real Purpose of the Bankruptcy Laws? 646

Summary 647

Chapter Fourteen

Partnerships: Formation and Operation 669

Partnerships—Advantages and Disadvantages 670

Alternative Legal Forms 671

Subchapter S Corporation 672

Limited Partnerships (LPs) 672

Limited Liability Partnerships (LLPs) 672

Limited Liability Companies (LLCs) 672

Partnership Accounting—Capital Accounts 673

Articles of Partnership 673

Discussion Question: What Kind of Business is This? 674

Accounting for Capital Contributions 674

Additional Capital Contributions and Withdrawals 677

Discussion Question: How Will the Profits Be Split? 678

Allocation of Income 678

Accounting for Partnership Dissolution 682

Dissolution—Admission of a New Partner 682

Dissolution—Withdrawal of a Partner 687

Summary 690

Chapter Fifteen

Partnerships: Termination and Liquidation 707

Termination and Liquidation—Protecting the Interests of All Parties 708

Partnership Liquidation Procedures 708

Statement of Partnership Liquidation 711

Deficit Capital Balances 711

Discussion Question: What Happens if a Partner Becomes Insolvent? 712

Partner with Deficit—Contribution to Partnership 712

Partner with Deficit—Loss to Remaining Partners 713

Two Partners with Deficit Capital Balances 714

Safe Payments to Partners 715

Preliminary Distribution of Partnership Assets 718

Preliminary Distribution Illustrated 718

Predistribution Plan 721

Summary 724

Chapter Sixteen

Accounting for State and Local Governments (Part 1) 739

Introduction to the Financial Reporting for State and Local Governments 740

Governmental Accounting—User Needs 741

Two Sets of Financial Statements 742

The Benefits of Reporting Two Sets of Financial Statements 743

Continuing Evolution of Financial Reporting Model 745

Internal Recordkeeping—Fund Accounting 745

Fund Accounting Classifications 746

Overview of State and Local Government Financial Statements 750

Government-Wide Financial Statements 750

Fund Financial Statements 752

Accounting for Governmental Funds 756

The Importance of Budgets and the Recording of Budgetary Entries 757

Encumbrances 759

Recognition of Expenditures and Revenues 761

Discussion Question: Is It an Asset or a Liability? 763

Recognition of Revenues—Overview 764

Reporting Derived Tax Revenues Such as Income Taxes and Sales Taxes 765

Reporting Imposed Nonexchange Revenues Such as Property Taxes and Fines 765

Reporting Government-Mandated Nonexchange Transactions and Voluntary Nonexchange Transactions 767

Issuance of Bonds 768

Special Assessments 771

Interfund Transactions 772

Summary 775

Chapter Seventeen

Accounting for State and Local Governments (Part 2) 799

The Hierarchy of U.S. Generally Accepted Accounting Principles (GAAP) for State and Local Governments 799

Tax Abatement Disclosure 801

Defined Benefit Pension Plans 803

Lease Accounting 805

Solid Waste Landfill 808

Landfills—Government-Wide Financial Statements 809

Landfills—Fund Financial Statements 810

Works of Art and Historical Treasures 810

Infrastructure Assets and Depreciation 812

Comprehensive Annual Financial Report 813

The Primary Government and Component Units 815

Primary Government 815

Identifying Component Units 815

Reporting Component Units 817

Special-Purpose Governments 817

Discussion Question: Is it Part of the County? 818

Acquisitions, Mergers, and Transfers of Operations 819

Government-Wide and Fund Financial Statements Illustrated 820

Statement of Net Position—Government-Wide Financial Statements 820

Statement of Activities—Government-Wide Financial Statements 822

Balance Sheet—Governmental Funds—Fund Financial Statements 825

Statement of Revenues, Expenditures, and Other Changes in Fund Balances—

Governmental Funds—Fund Financial Statements 827

Statement of Net Position—Proprietary Funds—Fund Financial Statements 829

Statement of Revenues, Expenses, and Other Changes in Net Position—

Proprietary Funds—Fund Financial Statements 829

Statement of Cash Flows—Proprietary Funds—Fund Financial Statements 829

Reporting Public Colleges and Universities 834

Summary 840

Chapter Eighteen

Accounting and Reporting for Private Not-for-Profit Entities 861

The Structure of Financial Reporting 862

Financial Statements for Private Not-for-Profit Entities 864

Statement of Financial Position 865

Statement of Activities 867

Statement of Functional Expenses 872

Statement of Cash Flows 872

Accounting for Contributions and Exchange Transactions 874

Exchange Transaction or Contribution? 874

Contributions—Unconditional or Conditional? 875

Discussion Question: Is This Really an Asset? 879

Contributed Services 880

Reporting Works of Art and Historical Treasures 881

Holding Contributions for Others 882

Exchange Transactions 883

Mergers and Acquisitions 884

Tax-Exempt Status 886

Transactions for a Private Not-for-Profit Entity Illustrated 888

Discussion Question: Are Two Sets of GAAP Really Needed for Colleges and Universities? 891

Accounting for Health Care Entities—Reporting Revenues 892

Summary 897

Chapter Nineteen

Accounting for Estates and Trusts 919

Accounting for an Estate 919

Administration of the Estate 920

Property Included in the Estate 921

Discovery of Claims against the Decedent 921

Protection for Remaining Family Members 922

Estate Distributions 922

Estate and Inheritance Taxes 924

The Distinction between Income and Principal 928

Recording of the Transactions of an Estate 929

Discussion Question: Is This Really an Asset? 932

Charge and Discharge Statement 933

Accounting for a Trust 934

Recordkeeping for a Trust Fund 937

Accounting for the Activities of a Trust 938

Summary 939


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