Advanced Accounting, Fourteenth Edition
By Joe B. Hoyle, Thomas F. Schaefer and Timothy S. Doupnik
Contents:
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
Salesforce.com 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
Appendix
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
INDEX 953