Advanced Accounting Fourth Edition By Patrick E. Hopkins and Robert F. Halsey Solution Manual Chapter 1—Accounting for Intercorporate Investments 1. a. If the investor acquired 100% of the investee at book value, the Equity Investment account is equal to the Stockholders’ Equity of the investee company. It, therefore, includes the assets and liabilities of the investee company in one account. The investor’s balance sheet, therefore, includes the Stockholders’ Equity of the investee company, and, implicitly, its assets and liabilities. In the consolidation process, the balance sheets of the investor and investee company are brought together. Consolidated Stockholders’ Equity will be the same as that which the investor currently reports; only total assets and total liabilities will change. b. If the investor owns 100% of the investee, the equity income that the investor reports is equal to the net income of the investee, thus implicitly including its revenues and expenses. Replacing the equity income with the revenues and expenses of the investee company in the consolidation process will yield the same net income. 2. FASB ASC 323-10 provides the following guidance with respect to the accounting for receipt of dividends using the equity method: The equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial decisions of the investee. The investor then has a degree of responsibility for the return on its investment, and it is appropriate to include in the results of operations of the investor its share of the earnings or losses of the investee. (¶323-10-05-5) The equity method is an appropriate means of recognizing increases or decreases measured by generally accepted accounting principles (GAAP) in the economic resources underlying the investments. Furthermore, the equity method of accounting more closely meets the objectives of accrual accounting than does the cost method because the investor recognizes its share of the earnings and losses of the investee in the periods in which they are reflected in the accounts of the investee. (¶323-10-05-4) Under the equity method, an investor shall recognize its share of the earnings or losses of an investee in the periods for which they are reported by the investee in its financial statements rather than in the period in which an investee declares a dividend (¶323-10- 35-4).