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Chapter 2
1 Only the investor’s accounts are affected when outstanding stock is acquired from existing stockholders. The
investor records the investment at its cost. Since the investee company is not a party to the transaction, its
accounts are not affected.
Both investor and investee accounts are affected when unissued stock is acquired directly from the
investee. The investor records the investment at its cost and the investee adjusts its asset and owners’ equity
accounts to reflect the issuance of previously unissued stock.
2 Goodwill arising from an equity investment of 20 percent or more is not recorded separately from the
investment account. Under the equity method, the investment is presented on one line of the balance sheet in
accordance with the one-line consolidation concept.
3 Dividends received from earnings accumulated before an investment is acquired are treated as decreases in
the investment account balance under the fair value/cost method. Such dividends are considered a return of
a part of the original investment.
4 The equity method of accounting for investments increases the investment account for the investor’s share
of the investee’s income and decreases it for the investor’s share of the investee’s losses and for dividends
received from the investee. In addition, the investment and investment income accounts are adjusted for
amortization of any investment cost-book value differentials related to the interest acquired. Adjustments to
the investment and investment income accounts are also needed for unrealized profits and losses from
transactions between the investor and investee companies. A fair value adjustment is optional under SFAS
No. 159.
5 The equity method is referred to as a one-line consolidation because the investment account is reported on
one line of the investor’s balance sheet and investment income is reported on one line of the investor’s income
statement (except when the investee has discontinued operations). In addition, the investment income is
computed such that the parent company’s income and stockholders’ equity are equal to the consolidated net
income and consolidated stockholders’ equity that would result if the statements of the investor and investee
were consolidated.
6 If the equity method is applied correctly, the income of the parent company will generally equal the
controlling interest share of consolidated net income.
7 The difference in the equity method and consolidation lies in the detail reported, but not in the amount of
income reported. The equity method reports investment income on one line of the income statement whereas
the details of revenues and expenses are reported in a consolidated income statement.
8 The investment account balance of the investor will equal underlying book value of the investee if (a) the
equity method is correctly applied, (b) the investment was acquired at book value which was equal to fair
value, the pooling method was used, or the cost-book value differentials have all been amortized, and (c)
there have been no intercompany transactions between the affiliated companies that have created investment
account-book value differences.
9 The investment account balance must be converted from the cost to the equity method when acquisitions
increase the interest held to 20 percent or more. The amount of the adjustment is the difference between the
investment income reported under the cost method in prior years and the income that would have been
reported if the equity method of accounting had been used. Changes from the cost to the equity method of
accounting for equity investments are changes in the reporting entity that require restatement of prior years’
financial statements when the effect is material.
10 The one-line consolidation is adjusted when the investee’s income includes gains or losses from discontinued
operations. In this case, the investor’s share of the investee’s ordinary income is reported as investment
income under a one-line consolidation, but the investor’s share of gains and losses from discontinued
operations is combined with similar items of the investor.
11 The remaining 15 percent interest in the investee is accounted for under the fair value/cost method, and the
investment account balance immediately after the sale becomes the new cost basis.
12 Yes. When an investee has preferred stock in its capital structure, the investor has to allocate the investee’s
income to preferred and common stockholders. Then, the investor takes up its share of the investee’s income
allocated to common stockholders in applying the equity method. The allocation is not necessary when the
investee has only common stock outstanding.
13 Goodwill impairment losses are calculated by business reporting units. For each reporting unit, the company
must first determine the fair values of the net assets. The fair value of the reporting unit is the amount at
which it could be purchased in a current market transaction. This may be based on market prices, discounted
cash flow analyses, or similar current transactions. This is done in the same manner as is done to originally
record a combination. The first step requires a comparison of the carrying value and fair value of all the net
assets at the business reporting level. If the fair value exceeds the carrying value, goodwill is not impaired
and no further tests are needed. If the carrying value exceeds the fair value, then we proceed to step two. In
step two, we calculate the implied value of goodwill. Any excess measured fair value over the net identifiable
assets is the implied fair value of goodwill. The company then compares the goodwill’s implied fair value
estimate to the carrying value of goodwill to determine if there has been an impairment during the period.
14 Yes. Impairment losses for subsidiaries are computed as outlined in the solution to question 13. Companies
compare fair values to book values for equity method investments as a whole. Firms may recognize
impairments for equity method investments as a whole, but perform no separate goodwill impairment tests.
SOLUTIONS TO EXERCISES
Solution E2-1
1 d
2 c
3 c
4 d
5 b
1 d
2 b
3 d
4 b
Pop’s investment is reported at its $600,000 cost because the equity
method is not appropriate and because Pop’s share of Son’s income
exceeds dividends received since acquisition [($520,000 × 15%) >
$40,000].
5 c
Dividends received from Sun for the two years were $10,500 ($70,000 ×
15% - all in 2017), but only $9,000 (15% of Sun’s income of $60,000 for
the two years) can be shown on Pam’s income statement as dividend
income from the Sun investment. The remaining $1,500 reduces the
investment account balance.
6 c
[$100,000 + $300,000 + ($600,000 × 10%)]
7 a
8 d
Investment balance January 2 $250,000
Add: Income from Sun ($100,000 × 30%) 30,000
Investment in Sun December 31 $280,000
Solution E2-3
2 Goodwill
Solution E2-4
These words were repeated again and again with little variation.
The woman who lay for some time as she had fallen was then
supposed to be able to see things in the world of Ilogo, and was
brought to after half an hour’s insensibility; she looked very much
prostrated. She averred that she had seen Ilogo, that he had told her
Quengueza was not bewitched.
Chaillu heard one day by accident that a man had been
apprehended on a charge of causing the death of one of the chief
men of the village, and went to Dayoko, the king, and asked about it.
He said yes, the man was to be killed; that he was a notorious
wizard, and had done much harm.
Chaillu begged to see this terrible being, and was taken to a
rough hut, within which sat an old, old man, with wool white as snow,
wrinkled face, bowed form, and shrunken limbs. His hands were tied
behind him, and his feet were placed in a rude kind of stocks. This
was the great wizard. Several lazy negroes stood guard over him,
and from time to time insulted him with opprobrious epithets and
blows, to which the poor old wretch submitted in silence. He was
evidently in his dotage.
When asked if he had no friends, no relatives, no son or daughter
or wife to take care of him, he said sadly, “No one.”
Now here was the secret of this persecution. They were tired of
taking care of the helpless old man, who had lived too long, and a
charge of witchcraft by the greegree man was a convenient pretext
for putting him out of the way.
The Wizard in the Stocks.
Chaillu went, however, to Dayoko, and argued the case with him,
and tried to explain the absurdity of charging a harmless old man
with supernatural powers; told him that God did not permit witches to
exist, and dually made an offer to buy the old wretch, offering to give
some pounds of tobacco, one or two coats, and some looking-
glasses for him, goods which would have bought an able-bodied
slave.
Dayoko replied that for his part he would be glad to save him, but
that the people must decide; that they were much excited against
him, but that he would, to please Chaillu, try to save his life.
During the night following our travellers heard singing all over the
town all night, and a great uproar. Evidently they were preparing
themselves for the murder. Even these savages cannot kill in cold
blood, but work themselves into a frenzy of excitement first, and then
rush off to do the bloody deed.
Early in the morning the people gathered together with the fetish
man, the rascal who was at the bottom of the murder, in their midst.
His bloodshot eyes glared in savage excitement as he went round
from man to man getting the votes to decide whether the old man
should die.
In his hands he held a bundle of herbs, with which he sprinkled
three times those to whom he spoke. Meantime a man was stationed
on the top of a high tree, whence he shouted from time to time in a
loud voice, “Jocoo! Jocoo!” at the same time shaking the tree
strongly.
Jocoo is devil among the Mbousha, and the business of this man
was to keep away the evil spirit, and to give notice to the fetish-man
of his approach.
At last the sad vote was taken. It was declared that the old man
was a most malignant wizard, that he had already killed a number of
people, that he was minded to kill many more, and that he must die.
No one would tell Chaillu how he was to be killed, and they proposed
to defer the execution till his departure. The whole scene had
considerably agitated Chaillu, and he was willing to be spared the
end. Tired and sick at heart, Chaillu lay down on his bed about noon
to rest and compose his spirits a little. After a while he saw a man
pass his window, almost like a flash, and after him a horde of silent
but infuriated men. They ran towards the river. Then in a little while
was heard a couple of sharp piercing cries, as of a man in great
agony, and then all was still as death. Chaillu got up, guessing the
rascals had killed the poor old man, and turning his steps toward the
river, was met by the crowd returning, every man armed with axe,
knife, cutlass, or spear, and these weapons and their own hands and
arms and bodies all sprinkled with the blood of their victim. In their
frenzy they had tied the poor wizard to a log near the river bank, and
then deliberately hacked him into many pieces. They finished by
splitting open his skull and scattering the brains in the water. Then
they returned; and to see their behaviour, it would have seemed as
though the country had just been delivered from a great curse.
By night the men, whose faces for two days had filled Chaillu with
loathing and horror, so bloodthirsty and malignant were they, were
again as mild as lambs, and as cheerful as though they had never
heard of a witch tragedy.
The following is a fair sample of “witch-test,” as practised in this
region. A Gaboon black trader in the employment of a white
supercargo, died suddenly. His family thinking that the death had
resulted from witchcraft, two of his sisters were authorised to go to
his grave and bring his head away in order that they might test the
fact. This testing is effected in the following manner: An iron pot with
fresh water is placed on the floor; at one side of it is the head of the
dead man, at the other side is seated a fetish doctor. The latter
functionary then puts in his mouth a piece of herb, supposed to
impart divining powers, chews it, and forms a magic circle by spitting
round the pot, the head, and himself. The face of the murderer, after
a few incantations, is supposed to be reflected on the water
contained in the pot. The fetish man then states he sees the
murderer, and orders the head to be again put back to its proper
grave, some days being then given to him for deliberation. In the
mean time he may fix on a man who is rich enough to pay him a
sufficient bribe to be excused of the charge, and if so he confesses
that the fetish has failed.
In the central regions of Eastern Africa all that is sacerdotal is
embodied in individuals called Mganga or Mfumbo. They swarm
throughout the land; are of both sexes: the women, however,
generally confine themselves to the medical part of the profession.
The profession is hereditary; the eldest or the cleverest son begins
his education at an early age, and succeeds to his father’s functions.
There is little mystery, says Burton, in the craft, and the magicians of
Unyamwezi have not refused to initiate some of the Arabs. The
power of the Mganga is great; he is treated as a sultan, whose word
is law, and as a giver of life and death. He is addressed by a kingly
title, and is permitted to wear the chieftain’s badge, made of the base
of a conical shell. He is also known by a number of small greasy and
blackened gourds filled with physic and magic hanging round his
waist, and by a little more of the usual grime, sanctity and dirt being
closely connected in Africa. These men are sent for from village to
village, and receive as spiritual fees sheep and goats, cattle and
provisions. Their persons, however, are not sacred, and for criminal
acts they are punished like other malefactors. The greatest danger to
them is an excess of fame. A celebrated magician rarely, if ever, dies
a natural death; too much is expected from him, and a severe
disappointment leads to consequences more violent than usual.
The African phrase for a man possessed is ana’p’hepo, he has a
devil. The Mganga is expected to heal the patient by expelling the
possession. Like the evil spirit in the days of Saul, the unwelcome
visitant must be charmed away by sweet music; the drums cause
excitement, the violent exercise expels the ghost. The principal
remedies are drumming, dancing, and drinking till the auspicious
moment arrives. The ghost is then enticed from the body of the
possessed into some inanimate article which he will condescend to
inhabit. This, technically called a Keti or stool, may be a certain kind
of bead, two or more bits of wood bound together by a strip of
snake’s skin, a lion’s or a leopard’s claw, and other similar articles
worn round the head, the arm, the wrist, or the ankle. Paper is still
considered great medicine by the Wasukuma and other tribes, who
will barter valuable goods for a little bit: the great desideratum of the
charm in fact appears to be its rarity, or the difficulty of obtaining it.
Hence also the habit of driving nails into and hanging rags upon
trees. The vegetable itself is not worshipped, as some Europeans,
who call it the devil’s tree, have supposed; it is merely the place for
the laying of ghosts, where by appending the keti most acceptable to
the spirit, he will be bound over to keep the peace with man. Several
accidents in the town of Zanzibar have confirmed even the higher
orders in their lurking superstition. Mr. Peters, an English merchant,
annoyed by the slaves, who came in numbers to hammer nails and
to hang iron hoops and rags upon a devil’s tree in his court-yard,
ordered it to be cut down, to the horror of all the black beholders.
Within six months five persons died in that house—Mr. Peters, his
two clerks, his cooper, and his ship’s carpenter. Salim bin Raschid, a
half caste merchant, well known at Zanzibar, avers, and his
companions bear witness to his words, that on one occasion, when
travelling northwards from Unyamzembe, the possession occurred to
himself. During the night two female slaves, his companions, of
whom one was a child, fell without apparent cause into the fits which
denote the approach of a spirit. Simultaneously the master became
as one intoxicated; a dark mass—material, not spiritual—entered the
tent, threw it down, and presently vanished, and Salim bin Raschid
was found in a state of stupor, from which he did not recover till the
morning. The same merchant circumstantially related, and called
witnesses to prove, that a small slave boy, who was produced on the
occasion, had been frequently carried off by possession, even when
confined in a windowless room, with a heavy door carefully bolted
and padlocked. Next morning the victim was not found although the
chamber remained closed. A few days afterwards he was met in the
jungle, wandering absently, like an idiot, and with speech too
incoherent to explain what had happened to him. The Arabs of Iman
who subscribe readily to transformation, deride these tales; those of
African blood, believe them. The transformation belief, still so
common in many countries, and anciently an almost universal
superstition, is, curious to say, unknown amongst these East African
tribes.
The Mganga, Mr. Burton further informs us, is also a soothsayer.
He foretels the success, or failure of commercial undertakings, of
wars, and of kidnapping; he foresees famine and pestilence, and he
suggests the means of averting calamities. He fixes also before the
commencement of any serious affair fortunate conjunctions, without
which, a good issue cannot be expected. He directs, expedites, or
delays the march of a caravan; and in his quality of augur, he
considers the flight of birds, and the cries of beasts like his prototype
of the same class, in ancient Europe, and in modern Asia.
The principal instrument of the Mganga’s craft is one of the dirty
little buyou, or gourds, which he wears in a bunch round his waist,
and the following is the usual programme when the oracle is to be
consulted. The magician brings his implements in a bag of matting;
his demeanour is serious as the occasion, he is carefully greased,
and his head is adorned with the diminutive antelope horns, fastened
by a thong of leather above the forehead. He sits like a sultan, upon
a dwarf stool in front of the querist, and begins by exhorting the
highest possible offertory. No pay no predict. The Mganga has many
implements of his craft. Some prophesy by the motion of berries
swimming in a cup full of water, which is placed upon a low stool,
surrounded by four tails of the zebra, or the buffalo, lashed to stakes
planted upright in the ground. The Kasanda is a system of folding
triangles, not unlike those upon which plaything soldiers are
mounted. Held in the right hand, it is thrown out, and the direction of
the end points to the safe and auspicious route; this is probably the
rudest appliance of prestidigitation. The shero is a bit of wood, about
the size of a man’s hand, and not unlike a pair of bellows, with a
dwarf handle, a projection like a muzzle, and in a circular centre a
little hollow. This is filled with water, and a grain, or fragment of wood
placed to float, gives an evil omen if it tends towards the sides, and
favourable if it veers towards the handle or the nozzle. The Mganga
generally carries about with him, to announce his approach, a kind of
rattle. This is a hollow gourd of pine-apple, pierced with various
holes prettily carved, and half filled with maize grains, and pebbles;
the handle is a stick passed through its length, and secured by
cross-pins.
The Mganga has many minor duties. In elephant hunts he must
throw the first spear, and endure the blame if the beast escapes. He
marks ivory with spots disposed in lines and other figures, and thus
enables it to reach the coast, without let or hindrance. He loads the
kirangoze, or guide, with charms to defend him from the malice
which is ever directed at a leading man, and sedulously forbids him
to allow precedence even to the Mtongi, the commander and
proprietor of the caravan. He aids his tribe by magical arts, in wars
by catching a bee, reciting over it certain incantations, and loosing it
in the direction of the foe, when the insect will instantly summon an
army of its fellows and disperse a host however numerous. This
belief well illustrates the easy passage of the natural into the
supernatural. The land being full of swarms, and man’s body being
wholly exposed, many a caravan has been dispersed like chaff
before the wind by a bevy of swarming bees. Similarly in South
Africa the magician kicks an ant-hill, and starts wasps which put the
enemy to flight.
Here is an account of a queer dance witnessed in this land of
Mgangas and Mfumbos and fetishes, furnished by the celebrated
explorer Bakie:—“A little before noon Captain Vidal took leave of
King Passol, in order to prosecute his observations. I remained, but
shortly afterwards prepared to leave also. Passol, however, as soon
as he perceived my intention, jumped up, and in a good-humoured
way detaining me by the arm, exclaimed, ‘No go, no go yet; ‘top a
little; bye-bye you look im fetish dance; me mak you too much laugh!’
It appeared that the old man had heard me some time before, on
listening to the distant tattoo of a native drum, express a
determination to the young midshipman who was with me to go
presently to see the dance, with which I had little doubt that it was
accompanied. The noise of the drum, almost drowned by the
singing, whooping, and clamour of a multitude of the natives, was
soon heard approaching. When close to us the procession stopped,
and the dancers, all of whom were men, ranged themselves in
parallel lines from the front of an adjoining house, and commenced
their exhibition. They were specially dressed for the purpose, having
suspended from their hips a complete kilt formed of threads of grass-
cloth, manufactured by the natives of the interior, and likewise an
appendage of the same kind to one or both arms, just above the
elbow. Some had their faces and others their breasts marked with
white balls, given to them by the fetish as a cure or safeguard
against some disease which they either had or dreaded. The
dancing, although not elegant, was free from that wriggling and
contortion of body so common on the east coast. It consisted
principally in alternately advancing and drawing back the feet and
arms, together with a corresponding inclination of the body, and, at
stated times, the simultaneous clapping of hands, and a loud sharp
ejaculation of ‘Heigh!’ Although I have remarked that it was not
elegant, yet it was pleasing, from the regularity with which it was
accompanied. There were two men who did not dance in the line
among the rest, but shuffled around, and at times threaded the
needle among them: one was termed the master fetish, and the
other appeared to be his attendant; neither wore the fancy dress, but
they were both encircled by the usual wrapper round the loins. The
former had on a French glazed hat, held in great request by the
natives, and the other, chewing some root of a red colour, carried a
small ornamented stick, surmounted at the end like a brush with a
bunch of long and handsome feathers. At times one of these men
would stop opposite a particular individual among the dancers, and
entice him by gestures to leave the line and accompany him in his
evolutions, which finally always ended where they began, the
pressed man returning to his former place. For some time I had
observed the master fetish dancing opposite to the house, and with
many gesticulations apparently addressing it in a half threatening
half beseeching tone. Old Passol, who was standing close by me,
suddenly exclaimed, ‘Now you laugh too much; fetish he come!’
“Sure enough, forthwith rushed from the house among the
dancers a most extraordinary figure. It was a man mounted on stilts
at least six feet above the ground, of which from practice he had
acquired so great a command that he certainly was as nimble in his
evolutions as the most active among the dancers. He was
sometimes so quick that one stilt could hardly be seen to touch the
earth before it was relieved by the other. Even when standing still he
often balanced himself so well as not to move either stilt for the
space of two or three minutes. He wore a white mask with a large
red ball on each cheek, the same on his chin, and his eyebrows and
the lower part of his nose were painted with the same colour. Over
his forehead was a sort of vizor of a yellow colour, having across it a
line of small brass bells; it was armed in front by long alligator’s
teeth, and terminated in a confused display of feathers, blades of
grass, and the stiff hairs of elephants and other large animals. From
the top of his head the skin of a monkey hung pendant behind,
having affixed to its tail a wire and a single elephant’s hair with a
large sheep’s bell attached to the end. The skin was of a beautiful
light green, with the head and neck of a rich vermilion. From his
shoulders a fathom of blue dungaree with a striped white border
hung down behind; and his body and legs and arms were completely
enshrouded in a number of folds of the native grass-cloth, through
which he grasped in each hand a quantity of alligator’s teeth, lizard’s
skins, fowl’s bones, feathers, and stiff hairs, reminding me strongly of
the well-known attributes of Obi, the dread of the slave-owners of
Jamaica.
“The fetish never spoke. When standing still he held his arms
erect, and shook and nodded his head with a quick repetition; but
when advancing he extended them to their full length before him. In
the former case he appeared as if pointing to heaven, and
demanding its vengeance on the dancers and the numerous
bystanders around; and in the latter as one who, finding his
exhortations of no avail, was resolved to exterminate, in the might of
his gigantic stature and superior strength, the refractory set. The
master fetish was his constant attendant, always following, doubling,
and facing him, with exhortations uttered at one minute in the most
beseeching tone, accompanied hat in hand by obsequious bows,
and in the next threatening gestures, and violent, passionate
exclamations. The attendant on the master fetish was likewise
constantly at hand, with his stick applied to his mouth, and in one or
two instances when the masquerader approached, he crouched
close under him, and squirted the red juice of the root he was
chewing into his face. For upwards of an hour I watched the dance,
yet the fetish appeared untired; and I afterwards heard that the same
ceremony was performed every day, and sometimes lasted three or
four hours. I at first thought that it was merely got up for our
amusement, but was soon undeceived; and when, under the first
impression, I inquired of a bystander what man it was who performed
the character, he answered, with a mixture of pique at the question
and astonishment of my ignorance, ‘He no man; no man do same as
him; he be de diable! he be de debil!’ Still I was a little sceptic as to
their really holding this belief themselves, though they insisted on the
fact as they represented it to me; and therefore, after I had received
the same answer from all, I used to add in a careless way to try their
sincerity, ‘In what house does he dwell?’ ‘What! fetish! I tell you he
de debil; he no catch house; he lib (live) in dat wood,’ pointing to a