ACCOUNTING ADVANCED. Floyd A. Beams. Joseph H. Anthony. Robin P. Clement. Suzanne H. Lowensohn TENTH EDITION

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1 TENTH EDITION ADVANCED ACCOUNTING Floyd A. Beams Virginia Polytechnic Institute and State University Joseph H. Anthony Michigan State'University Robin P. Clement University of Oregon Suzanne H. Lowensohn Colorado State University Pearson Education International

2 CONTENTS Preface 12 CHAPTER 1 Business Combinations 17 Reasons for Business Communications 18 Antitrust Considerations 19 The Legal Form of Business Combinations 20 The Accounting Concept of a Business Combination 21 Accounting for Business Combinations under the Acquisition Method 22 Disclosure Requirements 31 The Sarbanes-Oxley Act of l l P' Electronic Supplement to Chapter 1 ES1 CHAPTER 2 Stock Investments Investor Accounting and Reporting 43 Accounting for Stock Investments 43 Equity Method of Accounting A One-Line Consolidation 47 Interim Acquisitions of an Investment Interest 53 Investment in a Step-by-Step Acquisition 55 Sale of an Equity Interest 56 Stock Purchases Directly from the Investee 56 Investee Corporation with Preferred Stock 57 Extraordinary Items and Other Considerations 57 Disclosures for Equity Investees 58 Testing Goodwill for Impairment 60 CHAPTER 3 An Introduction to Consolidated Financial Statements 79 Business Combinations Consummated through Stock Acquisitions 79 Consolidated Balance Sheet at Date of Acquisition 84 Consolidated Balance Sheets after Acquisition 88 Allocation of Excess to Identifiable Net Assets and Goodwill 90 Consolidated Income Statement 97

3 Contents Push-Down Accounting 99 Preparing a Consolidated Balance Sheet Worksheet 100 'W* Electronic Supplement to Chapter 3 ES3 CHAPTER 4 Consolidation Techniques and Procedures 119 Consolidation Under the Equity Method 119 Locating Errors 126 Excess Allocated to Identifiable Net Assets 126 Consolidated Statement of Cash Flows 132 Preparing a Consolidation Worksheet 136 Appendix: Trial Balance Working Paper Format 161 W Electronic Supplement to Chapter 4 ES4 CHAPTER 5 Intercompany Profit Transactions Inventories 165 Intercompany Inventory Transactions 166 Downstream and Upstream Sales 171 Unrealized Profits from Downstream Sales 173 Unrealized Profits from Upstream Sales 176 Consolidation Example Intercompany Profits from Downstream Sales 179 Consolidation Example Intercompany Profits from Upstream Sales 182 Appendix: SEC Influence on Accounting 202 The 1933 Securities Act 202 The Securities Exchange Act of The Sarbanes-Oxley Act 203 The Registration Statement for Security Issues 204 The Integrated Disclosure System 204 SEC Developments 206 H r Electronic Supplement to Chapter 5 ES5 CHAPTER 6 Intercompany Profit Transactions Plant Assets 209 Intercompany Profits on Nondepreciable Plant Assets 209 Intercompany Profits on Depreciable Plant Assets 214 Plant Assets Sold at Other Than Fair Value 223 Consolidation Example Upstream and Downstream Sales of Plant Assets 224 Inventory Items Purchased for Use as Operating Assets 227 -W^- Electronic Supplement to Chapter 6 ES6

4 CONTENTS CHAPTER 7 Intercompany Profit Transactions Bonds 245 Intercompany Bond Transactions 245 Constructive Gains and Losses on Intercompany Bonds 246 Parent-Company Bonds Purchases by Subsidiary 248 Subsidiary Bonds Purchases by Parent 254 W" Electronic Supplement to Chapter 7 ES7 CHAPTER 8 Consolidations Changes in Ownership Interests 273 Acquisitions During An Accounting Period 273 Piecemeal Acquisitions 278 Sale of Ownership Interests 279 Changes in Ownership Interests from Subsidiary Stock Transactions 286 Stock Dividends and Stock Splits by a Subsidiary 291 l l t ^ Electronic Supplement to Chapter 8 ES8 CHAPTER 9 Indirect and Mutual Holdings 307 Affiliation Structures 307 Indirect Holdings Father-Son-Grandson Structure 309 Indirect Holdings Connecting Affiliates Structure 313 Mutual Holdings Parent Stock Held by Subsidiary 318 Subsidiary Stock Mutually Held 328 W : Electronic Supplement to Chapter 9 ES9 CHAPTER 10 Subsidiary Preferred Stock, Consolidated Earnings Per Share, and Consolidated Income Taxation 345 Subsidiaries with Preferred Stock Outstanding 345 Parent-Company and Consolidated Earnings Per Share 353 Subsidiary with Convertible Preferred Stock 355 Subsidiary with Options and Convertible Bonds 356 Accounting for Income Taxes of Consolidated Entities 358 Income Tax Allocation 359 Separate-Company Tax Returns with Intercompany Gain 361 Effect of Consolidated and Separate-Company Tax Returns on Consolidated Procedures 365 Business Combinations 372 Financial Statement Disclosures for Income Taxes ^ Electronic Supplement to Chapter 10 ES10

5 Contents CHAPTER 1 1 Consolidation Theories, Push-Down Accounting, and Corporate Joint Ventures 399 Comparison of Consolidation Theories 400 Illustration Consolidation under Parent-Company and Entity Theories 402 Push-Down Accounting and Other Basis Considerations 411 Joint Ventures 418 Accounting for Variable Interest Entities 422 W* Electronic Supplement to Chapter 11 ES11 CHAPTER 12 Derivatives and Foreign Currency Transactions 441 Derivatives 441 FASB Statement No. 133: Accounting for Derivative Instruments and Hedging Activities 445 Accounting for Hedge Contracts: Illustrations of Cash Flow and Fair Value Hedge Accounting Using Interest Rate Swaps 455 Foreign Exchange Concepts and Definitions 459 Foreign Currency Transactions Other Than Forward Contracts 462 Foreign Currency Derivatives and Hedging Activities 467 CHAPTER 13 Foreign Currency Financial Statements 491 j Objectives of Translation and the Functional Currency Concept 491 Application of the Functional Currency Concept 493 Illustration: Translation under Statement No Illustration: Remeasurement under Statement No Hedging a Net Investment in a Foreign Entity 508 Appendix A: Illustration: Translation with Noncontrolling Interest 532 Appendix B: Statement of Cash Flows 542 Appendix C: Lower-of-Cost-or Market Rule to Remeasure Inventories 550 CHAPTER 14 Segment and Interim Financial Reporting 551 Segment Reporting Under FASB Statement No Interim Financial Reporting 558 Guidelines for Preparing Interim Statements 560 CHAPTER 1 5 Partnerships Formation, Operations, and Changes in Ownership Interests 579 Nature of Partnerships 579 Initial Investments in a Partnership 580

6 10 CONTENTS Additional Investments and Withdrawals 582 Partnership Operations 583 Profit and Loss Sharing Agreements 584 Changes in Partnership Interests 590 Purchases of an Interest from Existing Partners 591 Investing in an Existing Partnership 594 Dissociation of a Continuing Partnership through Death or Retirement 597 Limited Partnerships 599 CHAPTER 16 Partnership Liquidation 617 The Liquidation Process 617 Safe Payments to Partners 621 Installment Liguidations 623 Cash Distribution Plans 629 Insolvent Partners and Partnerships 632 CHAPTER 17 Corporate Liquidations and Reorganizations 647 Bankruptcy Reform Act of Liquidation 650 Illustration of a Liquidation Case 651 Reorganization 659 Financial Reporting during Reorganization 663 Financial Reporting for the Emerging Company 664 Illustration of a Reorganization Case 665 CHAPTER 18 An Introduction to Accounting for State and Local Governmental Units 681 Historical Development of Accounting Principles for State and Local Governmental Units 681 Overview of Basic Governmental Accounting Models and Principles 683 The Financial Reporting Entity 693 Comprenhensive Annual Financial Report 694 CHAPTER 19 Accounting for State and Local Governmental Units Governmental Funds 719 The General Fund 719 Accounting for the General Fund 719 Special Revenue Funds 730 Permanent Funds 731 Capital Project Funds 732 Special Assessment Activities 737 Debt Service Funds 737 Governmental Fund Financial Statements 740 Preparing the Governmentwide Financial Statements 743

7 Contents 11 CHAPTER 20 Accounting for State and Local Governmental Units Proprietary and Fiduciary Funds 765 Proprietary Funds 765 Internal Service Funds 766 Enterprise Funds 769 Proprietary Fund Financial Statements 772 Fiduciary Funds 776 Trust Funds 778 Preparing the Governmentwide Financial Statements 781 Required Proprietary Fund Note Disclosures 781 CHAPTER 21 Accounting for Not-for-Profit Organizations 791 The Nature of Not-for-Profit Organizations 791 Not-for-Profit Accounting Principles 792 Voluntary Health and Welfare Organizations 797 "Other" Not-for-Profit Organizations 803 Nongovernmental Not-for-Profit Hospitals and Other Health Care Organizations 804 Private Not-for-Profit Colleges and Universities 809 CHAPTER 22 Estates and Trusts 829 Creation of an Estate 829 Probate Proceedings 830 Administration of the Estate 830 Accounting for the Estate 831 Illustration of Estate Accounting 832 Accounting for Trusts 836 Estate Taxation 837 Glossary 849 Index 855