Advanced Accounting Joe Ben Hoyle

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Advanced
Accounting
Thirteenth Edition

Joe B. Hoyle
Associate Professor of Accounting
Robins School of Business
University of Richmond

Thomas F. Schaefer
KPMG Professor of Accountancy
Mendoza College of Business
University of Notre Dame

Timothy S. Doupnik
Associate Professor of Accounting
School of Business
College of Charleston
ADVANCED ACCOUNTING, THIRTEENTH EDITION
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Library of Congress Cataloging-in-Publication Data
Names: Hoyle, Joe Ben, author. | Schaefer, Thomas F., author. | Doupnik,
Timothy S., author.
Title: Advanced accounting / Joe B. Hoyle, Associate Professor of Accounting,
Robins School of Business, University of Richmond, Thomas F. Schaefer,
KPMG Professor of Accountancy, Mendoza College of Business, University of
Notre Dame, Timothy S. Doupnik, Associate Professor of Accounting, School
of Business, College of Charleston.
Description: Thirteenth Edition. | New York, NY : McGraw-Hill Education,
2016. | Revised edition of the authors’ Advanced accounting, 2015.
Identifiers: LCCN 2016040833 | ISBN 9781259444951 (hardback)
Subjects: LCSH: Accounting. | BISAC: BUSINESS & ECONOMICS / Accounting /
General.
Classification: LCC HF5636 .H69 2016 | DDC 657/.046—dc23
LC record available at https://lccn.loc.gov/2016040833

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To our families
The real purpose of books is to trap the
mind into doing its own thinking.
—Christopher Morley
About the Authors
Joe B. Hoyle, University of Richmond
Joe B. Hoyle is associate professor of accounting at the Robins School of Business at the
University of Richmond, where he teaches intermediate accounting, financial accounting,
and advanced accounting. In 2015, he was the first recipient of the J. Michael and Mary
Anne Cook Prize for undergraduate teaching. The Cook Prize is awarded by the American
Accounting Association and “is the foremost recognition of an individual who consistently
demonstrates the attributes of a superior teacher in the discipline of accounting.” Professor
Hoyle has also been named (in 2007) as the Virginia Professor of the Year by the Carnegie
Foundation for the Advancement of Teaching and the Center for Advancement and Support
of Education. He has been selected as a Distinguished Educator five times at the University
of Richmond and Professor of the Year on two occasions. He has authored a book of essays
titled Tips and Thoughts on Improving the Teaching Process in College, which is available
at http://oncampus.richmond.edu/∼ jhoyle/. His blog, Teaching—Getting the Most from Your
Students, at http://joehoyle-teaching.blogspot.com/ was named the Accounting Education
Innovation of the Year for 2013 by the American Accounting Association.

Thomas F. Schaefer, University of Notre Dame

Thomas F. Schaefer is the KPMG Professor of Accounting at the University of Notre Dame.
He has written a number of articles for scholarly journals such as The Accounting Review,
Journal of Accounting Research, Journal of Accounting & Economics, Accounting Hori-
zons, and others. His primary teaching and research interests are in financial accounting and
reporting. Tom is a past president of the American Accounting Association’s Accounting
Program Leadership Group. He received the 2007 Joseph A. Silvoso Faculty Merit Award
from the Federation of Schools of Accountancy and the 2013 Notre Dame Master of Science
in Accountancy Dincolo Outstanding Professor Award.

Timothy S. Doupnik, College of Charleston

Timothy S. Doupnik is distinguished professor emeritus of accounting at the University of
South Carolina. He is a current member of the accounting faculty at the College of Charles-
ton, where he teaches advanced and international accounting. Tim has published extensively
in the area of international accounting in journals such as The Accounting Review; Account-
ing, Organizations, and Society; Abacus; International Journal of Accounting; and Journal
of International Business Studies. Tim is a past president of the American Accounting Asso-
ciation’s International Accounting Section and a recipient of the section’s Outstanding Inter-
national Accounting Educator Award.

v
Advanced Accounting 13e Stays Current
Overall—this edition of the text
provides relevant and up-to-date
­accounting standards references
to the Financial Accounting
Standards Board (FASB) Ac-
counting Standards Codifica-
tion® (ASC).
Chapter Changes for Advanced
Accounting, 13th Edition:
Chapter 1
∙ Updated the chapter to reflect Accounting Standards
Update (ASU) No. 2016-07 to ASC Topic 323,
Investments—Equity Method and Joint Ventures,
entitled “Simplifying the Transition to the Equity
Method of Accounting.” The ASU is effective for
fiscal years beginning after December 15, 2016.
The ASU eliminates the requirement to retrospec-
tively apply the equity method to previously held
ownership interests in an investee when an increase
in ownership results in significant influence and thus
qualifies for use of the equity method.
∙ Updated coverage for Accounting Standards Update
(ASU) No. 2016-01, Financial Instruments—­Overall,
which requires equity investments (except those
accounted for under the equity method of accounting
or those that result in consolidation of the investee) to
be measured at fair value with changes in fair value
recognized in net income, unless fair values are not
readily determinable. Thus, the previously available-for-
sale category with fair value changes recorded in other
comprehensive income will no longer be available.
The ASU is effective for fiscal years beginning after
December 15, 2017, with early adoption permitted.
∙ Eliminate coverage of investee extraordinary items
to align the text coverage with Accounting Standards
Update No. 2015-01 which eliminates the concept of
extraordinary items.
∙ Updated terminology in discussion of intra-entity
gross profits to reflect the new revenue recognition
standards (ASC 606).
∙ Updated real-world references.
∙ Added and revised several end-of-chapter problems.
vi
Chapter 2
∙ Added new descriptive coverage of three recent real-
world business combinations—Facebook and What-
sApp, AT&T and DirecTV, and MeadwestVaco and
Rock-Tenn.
∙ Revised chapter learning objectives to focus on
combinations when the acquired firm is dissolved
vs. continued existence. The chapter also newly
­recognizes a learning objective on the related costs
that typically accompany business combinations.
∙ Added an updated appendix on pushdown account-
ing based on Accounting Standards Update (ASU)
No.2014-17, Business Combinations: Pushdown
Accounting. The ASU allows companies an option
to apply pushdown accounting for newly acquired
subsidiaries.
∙ Updated real-world references.
∙ In addition to several new and revised end-of-­chapter
problems, replaced/added new research cases that
provide students with real-world applications of
financial reporting for business combinations.
Chapter 3
∙ Added coverage of post-acquisition procedures for
excess fair value attributable to subsidiary long-term
debt. Moved coverage of pushdown accounting to
Chapter 2.
∙ Added a Discussion Question that addresses work-
sheet adjustments to the parent’s beginning-of-the-
year retained earnings.
∙ Updated real-world references.
∙ Added an appendix covering Accounting Stan-
dards Update (ASU 2014-02) to Topic 350,
“Intangibles—Goodwill and Other, on Account-
ing for Goodwill. The ASU provides an external
reporting option (i.e., amortization) for private
company goodwill accounting. The appendix also
covers ASU 2014-18, Accounting for Identifi-
able Intangible Assets in a Business Combination,
an amendment of Business Combinations (Topic
805). The new standards allow private companies
an option to simplify their accounting by recog-
nizing fewer intangible assets in future business
combinations.
∙ Added new equity method end-of-chapter problems
requiring the preparation of consolidated financial
statements subsequent to acquisition. In addition,
as the Accounting Profession Changes
changed the facts and requirements in several end-
of-chapter problems.
∙ Added a new research and analysis case on Micro-
soft’s 2015 goodwill impairment loss.
Chapter 4
∙ Updated real-world references.
∙ Added two new equity method end-of-chapter problems.
∙ Added new end-of-chapter cases using the financial
reports of Starbucks (step-acquisition example) and
Costco (various noncontrolling interest figures and
interpretations).
∙ Revised the end-of-chapter comprehensive FASB ASC
and IFRS research case. The new case, entitled Bardeen
Electric, continues to focus on valuation issues accom-
panying a business combination including alternative
goodwill measurement under IFRS. In addition, several
other end-of-chapter problems have been revised.
Chapter 5
∙ Updated terminology in discussion of intra-entity
gross profits to reflect the new revenue recognition
standards (ASC 606).
∙ Revised and expanded coverage of the deferral and
subsequent recognition of intra-entity gains on long-
term assets transfers across affiliates. The revised expo-
sition emphasizes the nature of reallocating intra-entity
gains across time increasing consistency with the chap-
ter’s coverage of intra-entity gross profits in inventory.
∙ Updated real-world references.
∙ Changed the facts and requirements in several end-
of-chapter problems.
Chapter 6
∙ Updated real-world references.
∙ Expanded coverage of post-control period reporting
for primary beneficiaries and variable interest enti-
ties including an example of consolidated statement
preparation.
∙ Added and revised several end-of-chapter problems.
Chapter 7
∙ Updated real-world references.
∙ Added coverage of the FASB 2015 Proposed
Accounting Standards Update on Income Taxes
(Topic 740), entitled Intra-Entity Asset Transfers.
The proposed accounting would converge the IFRS
and U.S. GAAP treatment.
∙ Updated terminology in discussion of intra-entity
gross profits to reflect the new revenue recognition
standards (ASC 606).
∙ Changed the facts and requirements in several end-
of-chapter problems.
Chapter 8
∙ Deleted the section within Interim Reporting related
to extraordinary items.
∙ Added a real-world example of a company with sea-
sonal items.
∙ Added the name of the relevant international stan-
dard to the title of sections on IFRS.
∙ Removed reference to IFRS from the learning
objectives.
∙ Updated references to actual company practices and
excerpts from annual reports.
∙ Changed the facts in several end-of-chapter
problems.
Chapter 9
∙ Reduced the size of Exhibit 9.1 containing exchange
rates for selected countries.
∙ Rewrote the section now titled Forward Contracts
that was previously titled Spot and Forward Rates.
∙ Moved the section on foreign currency borrowing
from the end of the chapter to immediately follow
the section on foreign currency transactions.
∙ Moved the portion of the IFRS section at the end of
the chapter that deals with foreign currency transac-
tions to immediately follow the section on foreign
currency borrowing.
∙ Expanded the learning objective related to how for-
ward contracts and foreign currency options can
be used to hedge foreign exchange risk to include
understanding what types of foreign exchange risk
can be hedged.
∙ Added new learning objectives on the accounting
guidelines for derivatives and the basics of hedge
accounting.
∙ Updated real-world references including examples
of company practices, excerpts from annual reports,
and foreign exchange rates.
vii
∙ Added language to more clearly explain the impact
that the accounting for a derivative financial instru-
ment used to hedge a foreign exchange risk has on
financial statements within the examples demon-
strating the accounting for various types of foreign
currency hedges.
∙ Updated the section at the end of the chapter that
summarizes the accounting for derivative financial
instruments under IFRS.
∙ Changed the facts in several end-of-chapter
problems.
∙ Updated the develop your skills assignments based
on actual exchange rates.
Chapter 10
∙ Updated references to actual company practice and
related excerpts from annual reports.
∙ In the section on Exchange Rates Used in Transla-
tion, added instruction to first read the related Dis-
cussion Question before continuing.
∙ Removed reference to the theoretical possibility of
translating income statement items at the current
exchange rate.
∙ Removed reference to a research study published in
1988 that investigated the weighting of functional
currency indicators.
∙ Moved the section on IFRS from the end of the
chapter to immediately after the section describing
U.S. authoritative literature.
∙ Changed facts in several end-of-chapter problems.
Chapter 11
∙ Updated real-world references.
∙ Removed the discussion of culture as a reason for
accounting diversity and the section “A General
Model of the Reasons for International Differences
in Financial Reporting.”
∙ Expanded discussion of results from the FASB-
IASB convergence process to include a new exhibit
summarizing successful convergence projects.
∙ Added a section on “IFRS for SMEs.”
∙ Added a section on the “Relevance of IFRS for U.S.
Accountants.”
∙ Removed the section “U.S. GAAP Reconciliations.”
∙ Added a major new section focusing on the “­Conversion
of IFRS Financial Statements to U.S. GAAP.”
viii
∙ Deleted the section “A Principles-Based Approach
to Standard Setting.”
∙ Revised the Comprehensive Illustration to show the
process for determining conversion worksheet entries
necessary to convert from IFRS to U.S. GAAP for
nine differences between the two sets of standards.
∙ Added several new questions related to material
added to the chapter.
∙ Added several new problems focusing on the con-
version of IFRS to U.S. GAAP.
∙ Deleted the end-of-chapter case related to “Volun-
tary Adoption of IFRS” and added a new case related
to “IFRS Website.”
Chapter 12
∙ Updated SEC data and Registration Statement
exemptions.
∙ Updated SEC division information.
∙ Updated web link references as necessary.
∙ Revised end-of-chapter material.
Chapter 13
∙ Added discussion of reporting issues that compa-
nies face as the possibility of bankruptcy grows,
such as the need to test goodwill and other assets
for impairment and the possibility that a valuation
allowance is required to offset any deferred income
tax assets.
∙ Presented coverage of new FASB pronouncement:
Accounting Standards Update 2014-15 (“Disclosure
of Uncertainties about an Entity’s Ability to Con-
tinue as a Going Concern”) which provides account-
ing and reporting guidance if the possibility arises
that substantial doubt exists as to whether a company
will be able to remain a going concern.
∙ Included additional discussion about the liquidation
basis of accounting, including examples of the neces-
sary financial statements.
∙ Revised references to include companies that have
recently experienced bankruptcy and liquidation
such as RadioShack.
Chapter 14
∙ Revised tables showing the allocation of partnership
income/loss across partners to provide additional
 emphasis on the step-by-step nature of the income
distribution across partners.
∙ Changed the facts and requirements in several end-
of-chapter problems.
Chapter 15
∙ Split an existing end-of-chapter problem with two
unrelated parts into two separate problems.
∙ Added a new end-of-chapter problem related to
learning objectives LO 15-2 and LO 15-5.
∙ Changed the facts and requirements in several end-
of-chapter problems.
Chapter 16
∙ Updated numerous references to the financial state-
ments of a wide variety of state and local govern-
ments such as the City of Baltimore, the City of
Houston, the City of Charlotte, and the City of
Dallas.
Chapter 17
∙ Provided coverage of new pronouncement: GASB
Statement No. 76, “The Hierarchy of Generally
Accepted Accounting Principles for State and Local
Governments.”
∙ Provided coverage of new pronouncement: GASB
Statement No. 77, “Tax Abatement Disclosures.”
∙ Updated references to the financial statements of
state and local governments such as the City of Los
Angeles, the City of Chicago, the City of Orlando,
and the City of Boston.
Chapter 18
∙ Discussed the potential implications of FASB’s cur-
rent projects on the presentation and disclosure of
financial statements by not-for-profit entities
∙ Updated numerous references to the financial state-
ments of a wide variety of private not-for-profit enti-
ties such as ChildFund International, Girl Scouts of
the United States of America, American Heart Asso-
ciation, and Georgetown University.
Chapter 19
∙ Updated tax code references, numbers, and statistics.
∙ Included coverage of the American Taxpayer Relief
Act of 2012.
∙ Revised web links in footnote references as
appropriate.
∙ Revised end-of-chapter material reflecting changes
from the chapter.
ix
Students Solve the Accounting Puzzle

The approach used by Thinking Critically

Hoyle, Schaefer, and With this text, students gain a well-balanced appreciation
Doupnik allows students to of the accounting profession. As Hoyle 13e introduces
them to the field’s many aspects, it often focuses on past
think critically about ac- controversies and present resolutions. The text shows the
counting, just as they will development of financial reporting as a product of intense
in their careers and as they and considered debate that continues today and will in the
future.
prepare for the CPA exam.
Read on to understand Readability
how students will succeed The writing style of the 12 previous editions has been
as accounting majors and highly praised. Students easily comprehend chapter con-
cepts because of theConfirming
conversational tone used throughout
as future CPAs by using Pages
the book. The authors have made every effort to ensure that
­Advanced Accounting, 13e. the writing style remains engaging, lively, and consistent.

Consolidation of Financial Information 41

EXHIBIT 2.1
Acquirer Target
Real-World Examples
Deal Value
Recent Notable Business
Combinations AT&T
Berkshire Hathaway, Inc.
DirecTV
Precision Castparts
Students are
$47.4B
$32.0B
better able to relate what
Visa, Inc. Visa Europe Ltd they learn $23.3B
to what they will encounter in the
Facebook, Inc. WhatsApp $17.2B
MeadWestvaco RockTenn business world
$16.0B after reading these frequent
Intel Corporation
CVS Health Corporation
Altera Corporation
Omnicare, Inc.
examples.$15.0B
Quotations, articles, and illustra-
$12.9B
Marriott
Merck
Starwood Hotels Intl
Cubist
tions from$ Forbes,
$12.2B
9.5B
The Wall Street Journal,
Weyerhaeuser Plum Creek Timber Time, and $Bloomberg
8.4B BusinessWeek are
Celgene Corporation Receptos, Inc. $ 7.2B
Cox Automotive Dealertrack Technologies incorporated throughout the text. Data have
$ 4.0B
FedEx
Expedia
TNT Express
HomeAway
been pulled from
$ 4.8B
$ 3.9B
business, not-for-profit,
First Pages and
Microsemi Corporation PMC-Sierra, Inc. government financial statements as well as
$ 2.5B
Constellation Brands Ballast Point Brewing & Spirits $ 1.0B
official pronouncements.

182 Chapter manufacturing,

4 and delivery, substantial savings can result. As an example, Oracle’s acquisi-
tion of Sun Microsystems creates synergies by enabling Oracle to integrate its software prod-
uct lines with Sun’s hardware specifications. The acquisition further allows Oracle to offer
complete systems made of chips, computers, storage devices, and software with an aim
toward increased efficiency and quality.2 Other cost savings resulting from elimination of

Discussion Question
Discussion Questions
duplicate efforts, such as data processing and marketing, can make a single entity more profit-
able than the separate parent and subsidiary had been in the past. Such synergies often accom-
pany business combinations.
This feature facilitates student understand-
Although no two business combinations are exactly alike, many share one or more of the
DOES GAAP
following UNDERVALUE
characteristics POST-CONTROL
that potentially ing of the underlying accounting principles at
STOCK ACQUISITIONS?
enhance profitability:
∙ In Berkshire
Vertical Hathaway’s
integration of one2012 annual
firm’s report,
output and Warren workdistribution
another Buffett,
firm’s in in particular
discussingor the reporting situations. Simi-
company’s
further
processing.
post-control step acquisitions of Marmon Holdings, Inc., observed the following:
∙ Cost savings through elimination of duplicate facilities and staff. lar to minicases, these questions help explain
Marmon provides an example of a clear and substantial gap existing between book
∙ value
Quick and
entryintrinsic
for newvalue.
and existing products into domestic
Let me explain the odd origin of and thethisissues
foreign markets.at hand in practical terms. Many
differential.
∙ Economies ofI scale allowing
that greater
we hadefficiency andadditional
negotiatingshares
power.in Marmon, raising our
Last year
∙ ownership
The ability to
told you purchased times,increases,
thesenegotiating
cases are designed to demon-
toaccess
80% (upfinancing at more
from the 64%attractive rates. As
we acquired firm sizeI also
in 2008). told you that GAAP
accounting required us to immediately record the 2011 purchase on our books at farwhy
power with financial institutions can increase also. strate to students less a topic is problematic
∙ than
Diversification of business risk.
what we paid. I’ve now had a year to think about this and worth considering.
weird accounting rule, but I’ve
yet to find
Business an explanation
combinations thatbecause
also occur makesmanyany sense—nor can
firms seek the Charlie or
continuous Marc Hamburg,
expansion of their our
x organizations,
CFO, comeoften
up withintoone.
diversified areas. Acquiring
My confusion increasescontrol
when Iover a vast
am told network
that of differ-
if we hadn’t already
entowned
businesses
64%,has
thebeen
16%a we
strategy utilized in
purchased by2011
a number
wouldofhave
companies (sometimes
been entered on known as at
our books
conglomerates)
our cost. for decades. Entry into new industries is immediately available to the parent
without
In having to construct
2012 (and facilities,
in early 2013, develop to
retroactive products, train
year end management,
2012) we acquired or an
create market 10%
additional
recognition.
of Marmon Many
and corporations have successfully
the same bizarre accounting employed
treatmentthis
wasstrategy to produce
required. The $700 huge,
million
highly profitable organizations. Unfortunately, others discovered that the task of managing a
write-off we immediately incurred had no effect on earnings but did reduce book value
with 13th Edition Features

CPA Simulations
Hoyle 13e provides instructors and students access to CPA Simulations that correspond to several
key topics and chapters throughout the text. Students can complete these simulations online, allowing
them to practice advanced accounting concepts in a web-based interface that mimics the actual CPA
exam. There will be no hesitation or confusion when students sit for the real exam; they will know
exactly how to maneuver through the computerized test. Consolidation of

LO 2-10 38. On May 1, Burns Corporation acquired 100 percent of the outstanding ow
Corporation in exchange for $710,000 cash. At the acquisition date, Quig
were as follows:
End-of-Chapter Materials
Book Va
As in previous editions, the end-of-chapter material remains a strength ConfirmingCash of
Pagesthe text. The sheer num-
.......................................... $ 95,0
ber of questions, problems, and Internet assignments test and, therefore,Inventory. expand
Receivables . . . . .the
. . . . . . students’
.........................
......................................
200,0
210,0
knowledge of chapter concepts. Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,0
Building and equipment (net) . . . . . . . . . . . . . . . . . . . . . 270,0
Excel Spreadsheet Assignments extend specific problems and are located Patented on the 13th . . . . . . edition
Confirming Pages
technology ......................

Instructor Resources page, with templated versions that can be provided

64 Chapter 2
to students for
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $905,0

assignments. An Excel
74 Chapter 2 3. Ificon appears
the consideration next
transferred toacquired
for an those firmproblems that
exceeds the total fair valuehave corresponding
of the acquired
Long-term liabilities. . . spreadsheet
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
firm’s
...........................
$120,0
510,0
net assets, the residual amount is recognized in the consolidated financial statements as goodwill, an
assignments.
EXHIBIT 2.10
Pushdown Accounting—
Common stock ($5 par value). . . . . . . . . . . . . . . . . . . . .
intangible asset. When a bargain purchase occurs, individual assets and liabilities acquired continue
Smallport Company Balance Sheet at January 1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . .
210,0
90,0
to be recorded at their fair values and a gain on bargain purchase is recognized.
“Develop Your Skills” asks questions that address the four skills students need .to
. . . .master
. . . . . . . . . . . to
. . . . .pass
Date of Acquisition Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,000
Retained earnings.
Computers and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 ......... (25,0
4. Particular attention should be given to the recognition of intangible assets in business combinations.
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000
Total liabilities and stockholders equity . . . . . . . . . . . . $905,0
the CPA exam: Research, Analysis,
An intangible Spreadsheet,
asset must be and
recognized in an acquiring Communication.
firm’s financial statements if the assetAn arisesicon indicates when
Customer contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
from a legal or contractual right (e.g., trademarks, copyrights, artistic materials, royalty agreements).
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
700,000
70,000
$ 2,870,000

these skills are tested. If the intangible asset does not represent a legal or contractual right, the intangible will still beBurns
recog-directs Quigley to seek additional financing for expansion throu
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (250,000)
(100,000)
Additional paid-in capitalnized excess over if itpar is. capable
. . . . . . . . . . . of
. . . .being
. separated from
(20,000)the
firm (e.g., customer lists, noncontractual customer
issue. Consequently, Quigley will issue a set of financial statements sep
Additional paid-in capitalrelationships,from pushdown accounting unpatented . . . . . . . technology).(2,500,000) parent to support its request for debt and accompanying regulatory filing
Retained earnings, 1/1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0–
Total liabilities and equities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,870,000 pushdown accounting in order to show recent fair valuations for its assets
Prepare a separate acquisition-date balance sheet for Quigley Corp
Example: Pushdown Accounting accounting.
Comprehensive (Estimated
To illustrate an application Time: 45
of pushdown accounting, to the
we use 65Exhibit
Minutes)
2.3 BigNetFollowing are the account balances of Miller Company and Rich-
and Smallport Com-
pany example presented mond Company
previously asIfof
in this chapter. December
Smallport Company 31. The
applies fair account-
pushdown values of Richmond Company’s assets and liabilities are
Illustration ing,Note
its acquisition-date separately reported balance sheet would appear as presented in Exhibit 2.10:
that the valuesalso listed.
for each asset and liability in Smallport’s separate balance sheet above are iden-
tical to those reported in BigNet’s consolidated acquisition-date balance sheet. Develop Your Skills
Internal Reporting
Problem Pushdown accounting has several advantages for internal reporting. For example, it simplifies the con- Miller FASB ASC RESEARCH
Richmond AND ANALYSIS CASE—CONSIDERATION OR
Richmond
solidation process. If the subsidiary enters the acquisition-date fair value allocations into its records, Company Company Company
worksheet Entry A (to recognize the allocations originating from the fair-value adjustments) is not
needed. Amortizations of the excess fair value allocation (see Chapter 3) would be incorporated Book in Values COMPENSATION?
Book Values Fair Values
subsequent periods as well. C
Despite some simplifications to the consolidation process, pushdown accounting does not address
12/31 12/31 12/31
NaviNow Company agrees to pay $20 million in cash to the four former owne
the many issues in preparing consolidated financial statements that appear in subsequent chapters of
Cashto .be. seen
this text. Therefore, it remains . . .how
. . .many
. . .acquired
. . . . .companies
. . . . . .will
. . choose
. . . . to. elect
accounting. For newly acquired subsidiaries that expect to issue new debt or eventually undergo an
. . . pushdown
. $ 600,000
skills
CPA $ 200,000 $ 200,000
its assets
10.and liabilities.
Sloane, Inc.,These
issuesfour ownersshares
25,000 of TrafficEye developed
of its own commonand paten
stoc
Receivables . .investors
. . . . .with
. . .a .better
. . .understanding
. . . . . . . .of. the
. . company.
.. 900,000 300,000 time290,000
monitoring of traffic patterns on the nation’s top 200 frequently
initial public offering, fair
In summary, pushdown
values may provide
Inventory. . . . . . a. newly
accounting provides . . . .acquired
. . . . .subsidiary
. . . . . .the. .option
. . . .to. revalue
. its 1,100,000 600,000 820,000 shares of Benjamin Company. Benjamin will remain aconge
sepa
plans to combine the new technology with its existing global positioning syst
assets and liabilities to acquisition-date fair values in its separately reported financial statements. This
Buildings and
parentequipment (net) . . . shares
. . . .to. the
. . public
. fol- 9,000,000 800,000 Sloane record the issuance of these shares?
valuation option may be useful when the expects to offer the subsidiary ing900,000
substantial revenue increase.
As11.
partTo obtain all of contract,
the stock of Molly,alsoInc.,
agreesHarrison Corpora
lowing a period of planned improvements. Other benefits from pushdown accounting may arise when
Unpatented technology . . . . . . . . . . . . . . . . .
the subsidiary plans to issue debt and needs its separate financial statements to incorporate acquisition-
–0– –0– 500,000 of the acquisition NaviNow to pay additional a
In-process
date fair values and previously research
unrecognized intangibles inand development
their standalone ....
financial reports. –0– –0– ers 100,000 rison had to
upon achievement of pay $98,000
certain financialtogoals.
lawyers, accountants,
NaviNow will pay $8and a stoc
million to
1.
Accounts payable . . . . . . . . . . . . . . . . . . . . . .
What is a business combination?
(400,000) (200,000) (200,000)
TrafficEye if revenues
vices renderedfrom during
the combined system exceed
the creation of this$100 millioncombina
business over the
Questions
2. Notes
Describe the different payable
types of legal arrangements that can take place to create a business combination. (3,400,000) (1,100,000) (1,100,000)
estimates this contingent
in costs payment
associated to have
with the astock
probability adjusted
issuance. How present
will value
theseo
3. What does the term consolidated financial statements mean?
Totals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,800,000 $ 600,000 The four former owners have also been offered employment contracts w
$1,510,000
4. Within the consolidation process, what is the purpose of a worksheet?
5. Jones Company obtains all of the common stock of Hudson, system integration and performance enhancement issues. The employment
Common stock—$20 parInc.,value
by issuing . .50,000
. . . .shares
. . . of
. its own
$ (2,000,000)
stock. Under these circumstances, why might the determination of a fair value for the consideration
Problems service1.periods,
Whichhave of the following
nominal does
salaries not to
similar represent
those of aequivalent
primary employ
motiv
Common stock—$5 par value . . . . . . . . . . .
transferred be difficult? $ (220,000)
6. What is the accounting valuation basis for consolidating assets and liabilities in a business
sharing component over the next
a. Combinations arethree
oftenyears (if the employees
a vehicle remain
to accelerate with the
growth a
Additional paid-in capital . . . . . . . . . . . . . . . . (900,000) (100,000)
combination? LO 2-1 estimates to have a current fair value of $2 million. The four former owners o
7. How should a parent Retained
consolidate itsearnings, 1/1.and
subsidiary’s revenues . .expenses?
............... (2,300,000) (130,000) b. Cost savings can be achieved through elimination of du
stay on as employees of NaviNow for at least three years to help achieve the d
8. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Morgan Company acquires all of the outstanding shares of Jennings, Inc., for cash. Morgan trans- (6,000,000) (900,000) Synergies
Shouldc.NaviNow mayfor
account bethe
available
contingentthrough
paymentsquick entrytoforthenew
promised for
fers consideration more than the fair value of the company’s net assets. How should the payment in
excess of fair valueExpenses
be accounted for in . .the. .consolidation
. . . . . . . process?
.................. 3,400,000 750,000
9. Catron Corporation is having liquidity problems, and as a result, it sells all of its outstanding stock to
as consideration
d. Largertransferred
firms inaretheless
acquisition
likely toorfail.
as compensation expense to
Totals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lambert, Inc., for cash. Because of Catron’s problems, Lambert is able to acquire this stock at less
$ (7,800,000) $ (600,000)
than the fair value of the company’s net assets. How is this reduction in price accounted for within 2. Which of the following is the best theoretical justification f
LO 2-2
Note: Parentheses indicate a credit balance.
the consolidation process?
a. In form the companies are one entity; in substance they
ASC RESEARCH CASE—DEFENSIVE INTANGIBLE ASSET
Additional Information (not reflected in the preceding figures) b. In form the companies are separate; in substance they ar
∙ On December 31, Miller issues 50,000 shares of its $20 par Ahorita CPA
c. In form
Company
value common stock for all of the out-
skills
and substance
manufactures thetransponders
wireless companies for
aresatellite
one entity.
applicati
hoy44953_ch02_039-088.indd 74
standing shares of Richmond Company. 08/13/16 12:32 PM d. In form
acquired Zelltech and substance
Company, the companies
which is primarily are its
known for separate.
software(AIC
com
∙ As part of the acquisition agreement, Miller agrees to payLO the2-3 but $250,000
former owners of Richmond also
3. manufactures a specialty
What is a statutory transponder under the trade name “Z-Tech
merger?
if certain profit projections are realized over the next three years. Miller calculates the acquisition-
a. A merger approved by the Securities and Exchange Com
date fair value of this contingency at $100,000.
b. An acquisition involving the purchase of both stock and
∙ In creating this combination, Miller pays $10,000 in stock issue costs and $20,000 in accounting and
legal fees. c. A takeover completed within one year of the initial tend
d. A business combination in which only one company con
xi
Required LO 2-4 4. FASB ASC 805, “Business Combinations,” provides prin
hoy44953_ch02_039-088.indd 87
a. Miller’s stock has a fair value of $32 per share. Using the acquisition method: acquired business. When the collective fair values of the
1. Prepare the necessary journal entries if Miller dissolves Richmond so it is no longer a separate liabilities assumed exceed the fair value of the consideratio
legal entity. a. Recognized as an ordinary gain from a bargain purchase
2. Assume instead that Richmond will retain separate legal incorporation and maintain its own b. Treated as negative goodwill to be amortized over the p
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Acknowledgments
We could not produce a textbook of the quality and scope of Advanced Accounting without
the help of a great number of people. Special thanks go to the following:
∙ James O’Brien of the University of Notre Dame for his contribution to Chapters 12 and 19
and corresponding Solutions Manual files.
∙ Gregory Schaefer for his Chapter 2 descriptions of recent business combinations.
∙ Joyce van der Laan Smith of the University of Richmond and Paul Copley of James Mad-
ison University for their work on detailed reviews of the Twelfth Edition. Their feedback
and direction was instrumental during the revision process.
∙ Ilene Leopold Persoff of Long Island University (LIU Post) for her work on detailed reviews
of the Twelfth Edition and for checking the Thirteenth Edition manuscript, solutions man-
uals, and test bank files for accuracy. Ilene’s subject matter knowledge, detail-oriented
nature, and quality of work were instrumental in ensuring that this edition stayed accurate,
relevant, and of tremendous quality.
Additionally, we would like to thank Anna Lusher of Slippery Rock University, for updating
and revising the PowerPoint presentations; Jack Terry of ComSource Associates for updat-
ing the Excel Template Exercises for students to use as they work the select end-of-chapter
material; Stacie Hughes of Athens State University, Mark McCarthy of East Carolina Uni-
versity, and Beth Kobylarz of Accuracy Counts for checking the text and Solutions Manual
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We also want to thank the many people who completed questionnaires and reviewed the
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xv
Brief Contents
Walkthrough x 11. Worldwide Accounting Diversity and
1. The Equity Method of Accounting for International Standards 533
Investments 1 12. Financial Reporting and the Securities and
2. Consolidation of Financial Information 39 Exchange Commission 589
3. Consolidations—Subsequent to the Date of 13. Accounting for Legal Reorganizations and
Acquisition 89 Liquidations 615
4. Consolidated Financial Statements and 14. Partnerships: Formation and Operation 663
Outside Ownership 155 15. Partnerships: Termination and
5. Consolidated Financial Statements— Liquidation 701
Intra-Entity Asset Transactions 211 16. Accounting for State and Local Governments
6. Variable Interest Entities, Intra-Entity (Part 1) 735
Debt, Consolidated Cash Flows, and Other 17. Accounting for State and Local Governments
Issues 261 (Part 2) 793
7. Consolidated Financial Statements— 18. Accounting and Reporting for Private Not-
Ownership Patterns and Income Taxes 319 for-Profit Entities 849
8. Segment and Interim Reporting 363 19. Accounting for Estates and Trusts 895
9. Foreign Currency Transactions and Hedging
Foreign Exchange Risk 407 INDEX 929
10. Translation of Foreign Currency Financial
Statements 473

xvi
Contents
Walkthrough x Control—An Elusive Quality 45
Chapter One
The Equity Method of Accounting for
Investments 1
The Reporting of Investments in Corporate Equity
Securities 1
Fair-Value Method 2
Cost Method (Investments in Equity Securities without
Readily Determinable Fair Values) 2
Consolidation of Financial Statements 3
Discussion Question: Did the Cost Method Invite
Earnings Manipulation? 4
Equity Method 4
International Accounting Standard 28—Investments in
Associates 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 Standards 63
Excess of Investment Cost over Book Value Acquired 9
Discussion Question: Does the Equity Method Really
Apply Here? 10
The Amortization Process 12
Equity Method—Additional Issues 14
Reporting a Change to the Equity Method 14
Reporting Investee’s Other Comprehensive Income and
Irregular Items 16
Reporting Investee Losses 16
Reporting the Sale of an Equity Investment 17
Deferral of Intra-Entity Gross Profits in Inventory
Downstream Sales of Inventory 19
Upstream Sales of Inventory 20
Financial Reporting Effects and Equity Method
Criticisms 21
Equity Method Reporting Effects 21
Criticisms of the Equity Method 22
Fair-Value Reporting for Equity Method Investments
Summary 24
Chapter Two
Consolidation of Financial Information
Expansion through Corporate Takeovers 40
Reasons for Firms to Combine 40
Facebook and WhatsApp 42
AT&T and DirecTV 42
MeadwestVaco and Rock-Tenn 43
Business Combinations, Control, and Consolidated
Financial Reporting 43
Business Combinations—Creating a Single Economic
Entity 44
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 Subsidiary’s Books 61
Acquired In-Process Research and Development 62
Convergence between U.S. and International Accounting
Summary 63
Appendix A
Legacy Methods of Accounting for Business
Combinations 67
Appendix B
Pushdown Accounting 72
Chapter Three
Consolidations—Subsequent to the Date of
Acquisition 89
18 Consolidation—The Effects Created by the Passage of
Time 90
Consolidated Net Income Determination 90
The Parent’s Choice of Investment Accounting 90
Investment Accounting by the Acquiring Company 90
Internal Investment Accounting Alternatives—The
Equity Method, Initial Value Method, and Partial Equity
23 Method 91
Subsequent Consolidation—Investment Recorded by the
Equity Method 92
Acquisition Made during the Current Year 92
39 Determination of Consolidated Totals 94
Consolidation Worksheet 96
Consolidation Subsequent to Year of Acquisition—Equity
Method 98
Subsequent Consolidations—Investment Recorded Using
Initial Value or Partial Equity Method 103
Acquisition Made during the Current Year 103
Consolidation Subsequent to Year of Acquisition—Initial
Value and Partial Equity Methods 107
Discussion Question 111
xvii
xviii Contents
Discussion Question: How Does a Company Really
Decide Which Investment Method to Apply? 112
Excess Fair Value Attributable to Subsidiary Long-Term
Debt: Post-Acquisition Procedures 113
Goodwill Impairment 115
Assigning Goodwill to Reporting Units 116
Qualitative Assessment Option 116
Testing Goodwill for Impairment 117
Illustration—Accounting and Reporting for a Goodwill
Impairment Loss 118
Reporting Units with Zero or Negative Carrying
Amounts 119
Goodwill Impairment Simplified—Proposed Accounting
Standards Update (ASU) 119
Comparisons with International Accounting Standards 120
Amortization and Impairment of Other Intangibles 121
Contingent Consideration 122
Accounting for Contingent Consideration in Business
Combinations 122
Summary 123
Appendix
Private Company Accounting for Business
Combinations 127
Chapter Four
Consolidated Financial Statements and Outside
Ownership 155
Consolidated Financial Reporting in the Presence of a
Noncontrolling Interest 156
Subsidiary Acquisition-Date Fair Value in the Presence
of a Noncontrolling Interest 157
Discussion Question 158
Allocating Consolidated Net Income to the Parent
and Noncontrolling Interest 161
Partial Ownership Consolidations
(Acquisition Method) 162
Illustration—Partial Acquisition with No Control
Premium 162
Illustration—Partial Acquisition with Control Premium 170
Effects Created by Alternative Investment Methods 174
Revenue and Expense Reporting for Midyear
Acquisitions 175
Consolidating Postacquisition Subsidiary Revenue
and Expenses 175
Acquisition Following an Equity Method Investment 177
Step Acquisitions 177
Control Achieved in Steps—Acquisition Method 177
Example: Step Acquisition Resulting in Control—Acquisition
Method 177
Worksheet Consolidation for a Step Acquisition
(Acquisition Method) 179
Example: Step Acquisition Resulting after Control Is
Obtained 181
Discussion Question: Does GAAP Undervalue Post-
Control Stock Acquisitions? 182
Parent Company Sales of Subsidiary Stock—Acquisition
Method 182
Cost-Flow Assumptions 184
Accounting for Shares That Remain 184
Comparisons with International Accounting
Standards 184
Summary 185
Chapter Five
Consolidated Financial Statements—­
Intra-Entity Asset Transactions 211
Intra-Entity Inventory Transfers 212
The Sales and Purchases Accounts 212
Intra-Entity Gross Profit—Year of Transfer (Year 1) 213
Discussion Question: Earnings Management 214
Intra-Entity Gross Profit—Year Following Transfer
(Year 2) 215
Intra-Entity Gross Profit—Effect on Noncontrolling
Interest 217
Intra-Entity Inventory Transfers Summarized 218
Intra-Entity Inventory Transfers Illustrated: Parent Uses
Equity Method 219
Effects of Alternative Investment Methods on
Consolidation 227
Discussion Question: What Price Should We Charge
Ourselves? 230
Intra-Entity Land Transfers 232
Accounting for Land Transactions 232
Eliminating Intra-Entity Gains—Land Transfers 232
Recognizing the Effect on Noncontrolling Interest—Land
Transfers 234
Intra-Entity Transfer of Depreciable Assets 234
Deferral and Subsequent Recognition of Intra-Entity
Gains 235
Depreciable Asset Intra-Entity Transfers Illustrated 235
Years Following Downstream Intra-Entity Depreciable Asset
Transfers—Parent Uses Equity Method 238
Effect on Noncontrolling Interest—Depreciable Asset
Transfers 239
Summary 239
Chapter Six
Variable Interest Entities, Intra-Entity
Debt, Consolidated Cash Flows, and Other
Issues 261
Consolidation of Variable Interest Entities 261
What Is a VIE? 262
Consolidation of Variable Interest Entities 263
Procedures to Consolidate Variable Interest Entities 267
Consolidation of a Primary Beneficiary and VIE
Illustrated 268
Comparisons with International Accounting
Standards 271
Intra-Entity Debt Transactions 272
 Contents xix

Acquisition of Affiliate’s Debt from an Outside Party 273 Testing Procedures—Complete Illustration 366
Accounting for Intra-Entity Debt Transactions—Individual The Revenue Test 366
Financial Records 273 The Profit or Loss Test 367
Effects on Consolidation Process 275 The Asset Test 368
Assignment of Retirement Gain or Loss 276 Summary of Test Results 368
Intra-Entity Debt Transactions—Years Subsequent to Other Guidelines 368
Effective Retirement 276 Information to Be Disclosed by Reportable Operating
Discussion Question: Who Lost This $300,000? 277 Segments 370
Subsidiary Preferred Stock 279 Reconciliations to Consolidated Totals 372
Consolidated Statement of Cash Flows 281 Explanation of Measurement 373
Acquisition Period Statement of Cash Flows 282 Examples of Operating Segment Disclosures 373
Statement of Cash Flows in Periods Subsequent to Entitywide Information 375
Acquisition 286 Information about Products and Services 375
Consolidated Earnings per Share 286 Information about Geographic Areas 375
Subsidiary Stock Transactions 288 Discussion Question: How Does a Company Determine
Changes in Subsidiary Value—Stock Transactions 289 Whether a Foreign Country Is Material? 377
Subsidiary Stock Transactions—Illustrated 292 Information about Major Customers 378
Summary 296 International Financial Reporting Standard 8—Operating
Segments 379
Chapter Seven Interim Reporting 379
Consolidated Financial Statements—Ownership Revenues 380
Patterns and Income Taxes 319 Inventory and Cost of Goods Sold 380
Other Costs and Expenses 381
Indirect Subsidiary Control 319 Income Taxes 382
The Consolidation Process When Indirect Control Is Change in Accounting Principle 383
Present 320 Seasonal Items 384
Consolidation Process—Indirect Control 322 Minimum Disclosures in Interim Reports 385
Indirect Subsidiary Control—Connecting Segment Information in Interim Reports 386
Affiliation 328 International Accounting Standard 34—Interim Financial
Mutual Ownership 330 Reporting 386
Treasury Stock Approach 330 Summary 386
Mutual Ownership Illustrated 331
Income Tax Accounting for a Consolidated Entity 333 Chapter Nine
Affiliated Groups 334
Foreign Currency Transactions and Hedging
Deferred Income Taxes 334
Consolidated Tax Returns—Illustration 335
Foreign Exchange Risk 407
Income Tax Expense Assignment 336 Foreign Exchange Markets 408
Filing of Separate Tax Returns 337 Exchange Rate Mechanisms 408
Deferred Tax on Undistributed Earnings—Illustrated 338 Foreign Exchange Rates 408
Separate Tax Returns Illustrated 339 Foreign Currency Forward Contracts 409
Temporary Differences Generated by Business Foreign Currency Options 410
Combinations 341 Foreign Currency Transactions 411
Consolidated Entities and Operating Loss Accounting Issue 412
Carryforwards 342 Balance Sheet Date before Date of Payment 413
Income Taxes and Consolidated International Accounting Standard 21—The Effects of
Entities—Comparisons with International Accounting Changes in Foreign Exchange Rates 415
Standards 344 Foreign Currency Borrowing 415
Summary 344 Foreign Currency Loan 416
Hedges of Foreign Exchange Risk 417
Chapter Eight Derivatives Accounting 417
Segment and Interim Reporting 363 Fundamental Requirement of Derivatives Accounting 418
Determination of Fair Value of Derivatives 418
Segment Reporting 364 Accounting for Changes in the Fair Value of
The Management Approach 364
Derivatives 418
Determination of Reportable Operating Segments 364 Hedge Accounting 419
Quantitative Thresholds 365
Nature of the Hedged Risk 419
xx Contents
Hedge Effectiveness 420
Hedge Documentation 420
Hedging Combinations 420
Hedges of Foreign Currency Denominated Assets and
Liabilities 423
Cash Flow Hedge 423
Fair Value Hedge 423
Forward Contract Used to Hedge a Foreign Currency
Denominated Asset 423
Forward Contract Designated as Cash Flow Hedge
Forward Contract Designated as Fair Value Hedge
Discussion Question: Do we have a Gain or what?
Cash Flow Hedge versus Fair Value Hedge 431
Foreign Currency Option Used to Hedge a Foreign
Currency Denominated Asset 432
Option Designated as Cash Flow Hedge 433
Option Designated as Fair Value Hedge 435
Hedges of Unrecognized Foreign Currency
Firm Commitments 438
Forward Contract Used as Fair Value Hedge of a Firm
Commitment 438
Option Used as Fair Value Hedge of Firm Commitment 440
Hedge of Forecasted Foreign Currency Denominated
Transaction 443
Forward Contract Cash Flow Hedge of a Forecasted
Transaction 443
Option Designated as a Cash Flow Hedge
of a Forecasted Transaction 445
Use of Hedging Instruments 446
The Euro 448
International Financial Reporting Standard 9—Financial
Instruments 448
Summary 448
Chapter Ten
Translation of Foreign Currency Financial
Statements 473
Exchange Rates Used in Translation 474
Discussion Question: How Do We Report This?
Translation Adjustments 476
Balance Sheet Exposure 476
Translation Methods 477
Current Rate Method 477
Temporal Method 478
Translation of Retained Earnings 479
Complicating Aspects of the Temporal Method
Calculation of Cost of Goods Sold 480
Application of the Lower-of-Cost-or-Net-Realizable-Value
Rule 481
Property, Plant, and Equipment, Depreciation, and
Accumulated Depreciation 481
Gain or Loss on the Sale of an Asset 481
Treatment of Translation Adjustment 482
Authoritative Guidance 482
Determining the Appropriate Translation Method 483
Highly Inflationary Economies 484
Appropriate Exchange Rate 485
International Accounting Standard 21—The Effects of
Changes in Foreign Exchange Rates 486
The Translation Process Illustrated 487
Translation of Financial Statements—Current
Rate Method 489
Translation of the Balance Sheet 490
Translation of the Statement of Cash Flows 492
425 Remeasurement of Financial
428 Statements—Temporal Method 492
430 Remeasurement of the Income Statement 493
Remeasurement of the Statement of Cash Flows 495
Nonlocal Currency Balances 496
Comparison of the Results from Applying the Two
Different Methods 496
Underlying Valuation Method 497
Underlying Relationships 498
Hedging Balance Sheet Exposure 498
International Financial Reporting Standard 9—Financial
Instruments 499
Disclosures Related to Translation 499
Consolidation of a Foreign Subsidiary 500
Translation of Foreign Subsidiary Trial Balance 501
Determination of Balance in Investment Account—Equity
Method 502
Consolidation Worksheet 503
Summary 505
Chapter Eleven
Worldwide Accounting Diversity and
International Standards 533
Evidence of Accounting Diversity 533
Reasons for Accounting Diversity 536
Legal System 538
Taxation 538
Financing System 539
Inflation 539
475 Political and Economic Ties 539
Problems Caused by Diverse Accounting Practices 539
International Accounting Standards Committee 540
The IOSCO Agreement 541
International Accounting Standards Board
and IFRS 541
International Financial Reporting Standards (IFRS) 542
480 Use of IFRS 542
IFRS for SMEs 545
First-Time Adoption of IFRS 546
IFRS Accounting Policy Hierarchy 549
FASB–IASB Convergence 550
SEC Recognition of IFRS 552
IFRS Roadmap 553
A Possible Framework for Incorporating IFRS into U.S.
Financial Reporting 553
Relevance of IFRS for U.S. Accountants 554
 Contents xxi

Differences between IFRS and U.S. GAAP 554 Financial Reporting during Reorganization 636
Recognition Differences 554 Financial Reporting for Companies Emerging from
Measurement Differences 556 Reorganization 638
Discussion Question: Which Accounting Method Really Fresh Start Accounting Illustrated 639
Is Appropriate? 557 Discussion Question: Is This the Real Purpose of the
Classification, Presentation, and Disclosure Bankruptcy Laws? 641
Differences 557 Summary 642
IAS 1, “Presentation of Financial Statements” 558
Conversion of IFRS Financial Statements to U.S. GAAP 558 Chapter Fourteen
Obstacles to Worldwide Comparability Partnerships: Formation and Operation 663
of Financial Statements 564
Translation of IFRS into Other Languages 564
Partnerships—Advantages and Disadvantages 664
The Impact of Culture on Financial Reporting 564
Alternative Legal Forms 665
Subchapter S Corporation 665
Summary 565
Limited Partnerships (LPs) 666
Limited Liability Partnerships (LLPs) 666
Chapter Twelve Limited Liability Companies (LLCs) 666
Financial Reporting and the Securities and Partnership Accounting—Capital Accounts 666
Exchange Commission 589 Articles of Partnership 667
Discussion Question: What Kind of Business Is This? 668
The Work of the Securities Accounting for Capital Contributions 668
and Exchange Commission 589 Additional Capital Contributions and Withdrawals 671
Purpose of the Federal Securities Laws 591 Discussion Question: How Will the Profits Be Split? 672
Full and Fair Disclosure 593 Allocation of Income 672
Corporate Accounting Scandals and the Sarbanes-Oxley Accounting for Partnership Dissolution 676
Act 595 Dissolution—Admission of a New Partner 676
Creation of the Public Company Accounting Oversight Dissolution—Withdrawal of a Partner 681
Board 596 Summary 684
Registration of Public Accounting Firms 597
The SEC’s Authority and SEC Filings 598
Chapter Fifteen
The SEC’s Authority over Generally Accepted Accounting
Principles 598 Partnerships: Termination and
Filings with the SEC 601 Liquidation 701
Electronic Data Gathering, Analysis, and Retrieval System Termination and Liquidation—Protecting
(EDGAR) 606 the Interests of All Parties 702
Discussion Question: Is the Disclosure Worth the Termination and Liquidation Procedures Illustrated 702
Cost? 607 Statement of Liquidation 705
Summary 608 Deficit Capital Balance—Contribution by Partner 705
Deficit Capital Balance—Loss to Remaining Partners 706
Chapter Thirteen Discussion Question: What Happens If a Partner
Becomes Insolvent? 712
Accounting for Legal Reorganizations and
Installment Liquidations 713
Liquidations 615 Preliminary Distribution of Partnership Assets 713
An Overview of U. S. Bankruptcy Laws 616 Predistribution Plan 715
Bankruptcy Reform Act of 1978 618 Summary 718
Discussion Question: What Do We Do Now? 622
Discussion Question: How Much Is That Building Really Chapter Sixteen
Worth? 624 Accounting for State and Local Governments
Statement of Financial Affairs Illustrated 625
(Part 1) 735
Liquidation—Chapter 7 Bankruptcy 626
Role of the Trustee 628 Introduction to the Financial Reporting for State and Local
Statement of Realization and Liquidation Illustrated 629 Governments 736
The Liquidation Basis of Accounting 631 Governmental Accounting—User Needs 737
Reorganization—Chapter 11 Bankruptcy 633 Two Sets of Financial Statements 737
The Plan for Reorganization 633 The Advantage of Reporting Two Sets of Financial
Acceptance and Confirmation of Reorganization Plan 635 Statements 739
xxii Contents
Internal Record-Keeping—Fund Accounting 740
Fund Accounting Classifications 741
Overview of State and Local Government Financial
Statements 745
Government-Wide Financial Statements 745
Fund Financial Statements 747
Accounting for Governmental Funds 751
The Importance of Budgets and the Recording of Budgetary
Entries 751
Encumbrances 754
Recognition of Expenditures and Revenues 755
Discussion Question: Is It an Asset or a Liability?
Recognition of Revenues—Overview 759
Derived Tax Revenues Such As Income Taxes and Sales
Taxes 759
Imposed Nonexchange Revenues Such As Property Taxes and
Fines 760
Government-Mandated Nonexchange Transactions and
Voluntary Nonexchange Transactions 761
Issuance of Bonds 762
Special Assessments 765
Interfund Transactions 766
Summary 770
Chapter Seventeen
Accounting for State and Local
Governments (Part 2) 793
The Hierarchy of U.S. Generally Accepted Accounting
Principles (GAAP) for State and Local Governments 793
Tax Abatement Disclosure 795
Solid Waste Landfill 796
Landfills—Government-Wide Financial Statements 797
Landfills—Fund Financial Statements 798
Defined Benefit Pension Plans 798
Works of Art and Historical Treasures 800
Infrastructure Assets and Depreciation 802
Comprehensive Annual Financial Report 803
The Primary Government and Component Units 804
Primary Government 804
Identifying Component Units 805
Reporting Component Units 806
Special Purpose Governments 807
Discussion Question: Is It Part of the County? 808
Acquisitions, Mergers, and Transfers
of Operations 808
Government-Wide and Fund
Financial Statements Illustrated 809
Statement of Net Position—Government-Wide Financial
Statements 810
Statement of Activities—Government-Wide Financial
Statements 811
Balance Sheet—Governmental Funds—Fund Financial
Statements 815
Statement of Revenues, Expenditures, and Other Changes
in Fund Balances—Governmental Funds—Fund Financial
Statements 817
Statement of Net Position—Proprietary Funds—
Fund Financial Statements 817
Statement of Revenues, Expenses, and Other Changes
in Net Position—Proprietary Funds—Fund Financial
Statements 821
Statement of Cash Flows—Proprietary Funds—Fund
Financial Statements 821
Reporting Public Colleges and Universities 824
Summary 830
Chapter Eighteen
757 Accounting and Reporting for Private
Not-for-Profit Entities 849
The Structure of Financial Reporting 850
Financial Statements for Private Not-for-Profit Entities 851
Statement of Financial Position 853
Statement of Activities 854
Statement of Functional Expenses 858
Accounting for Contributions 860
Discussion Question: Is This Really an Asset? 862
Reporting Works of Art and Historical Treasures 862
Holding Contributions for Others 863
Contributed Services 865
Exchange Transactions 866
Tax-Exempt Status 867
Mergers and Acquisitions 868
Transactions for a Private Not-for-Profit
Entity Illustrated 870
Transactions Reported on Statement of Activities 872
Discussion Question: Are Two Sets of GAAP Really
Needed for Colleges and Universities? 873
Accounting for Health Care Entities 873
Accounting for Patient Service Revenues 874
Summary 876
Chapter Nineteen
Accounting for Estates and Trusts 895
Accounting for an Estate 895
Administration of the Estate 896
Property Included in the Estate 897
Discovery of Claims against the Decedent 897
Protection for Remaining Family Members 898
Estate Distributions 898
Estate and Inheritance Taxes 900
The Distinction between Income and Principal 904
Recording of the Transactions of an Estate 905
Discussion Question: Is This Really an Asset? 908
Charge and Discharge Statement 909
Accounting for a Trust 910
Record-Keeping for a Trust Fund 913
Accounting for the Activities of a Trust 914
Summary 915
Index 929
 chapter
The Equity Method
of Accounting for 1
Investments
T
he first several chapters of this text present the accounting and report- Learning Objectives
ing for investment activities of businesses. The focus is on investments After studying this chapter, you
when one firm possesses either significant influence or control over should be able to:
another through ownership of voting shares. When one firm owns enough
LO 1-1 Describe in general the
voting shares to be able to affect the decisions of another, accounting for various methods of accounting
the investment can become challenging and complex. The source of such for an investment in equity
complexities typically stems from the fact that transactions among the firms shares of another company.
LO 1-2 Identify the sole criterion for
affiliated through ownership cannot be considered independent, arm’s-length
applying the equity method
transactions. As in many matters relating to financial reporting, we look to of accounting and know the
transactions with outside parties to provide a basis for accounting valuation. guidelines to assess whether
When firms are affiliated through a common set of owners, measurements the criterion is met.
LO 1-3 Describe the financial
that recognize the relationships among the firms help to provide objectivity in
reporting for equity method
financial reporting. investments and prepare
basic equity method journal
entries for an investor.
LO 1-4 Allocate the cost of an equity
The Reporting of Investments in method investment and
compute amortization expense
Corporate Equity Securities to match revenues recognized
from the investment to the
In its recent annual report, The Coca-Cola Company describes its 28 percent excess of investor cost over
investment in Coca-Cola FEMSA, a Mexican bottling company with opera- investee book value.
tions throughout much of Latin America. The Coca-Cola Company uses the LO 1-5 Understand the financial
equity method to account for several of its bottling company investments, reporting consequences for:
including Coca-Cola FEMSA. The Coca-Cola Company states, a. A change to the equity
We use the equity method to account for investments in companies, if our method.
investment provides us with the ability to exercise significant influence over b. Investee’s other
operating and financial policies of the investee. Our consolidated net income comprehensive income.
includes our Company’s proportionate share of the net income or loss of these c. Investee losses.
companies. d. Sales of equity method
Our judgment regarding the level of influence over each equity method investments.
investment includes considering key factors such as our ownership interest, LO 1-6 Describe the rationale and
representation on the board of directors, participation in policy-making deci- computations to defer the
sions and material intercompany transactions. investor’s share of gross
profits on intra-entity inventory
Such information is hardly unusual in the business world; corporate inves- sales until the goods are either
tors frequently acquire ownership shares of both domestic and foreign busi- consumed by the owner or
nesses. These investments can range from the purchase of a few shares to the sold to outside parties.
acquisition of 100 percent control. Although purchases of corporate equity LO 1-7 Explain the rationale and
securities (such as the ones made by Coca-Cola) are not uncommon, they pose reporting implications of
a considerable number of financial reporting issues because a close relation- fair-value accounting for
ship has been established without the investor gaining actual control. These investments otherwise
issues are currently addressed by the equity method. This chapter deals with accounted for by the equity
accounting for stock investments that fall under the application of this method. method.
1
2 Chapter 1
LO 1-1
Describe in general the various
methods of accounting for an
investment in equity shares of
another company.
Generally accepted accounting principles (GAAP) recognize four different approaches to the
financial reporting of investments in corporate equity securities:
1. Fair-value method.
2. Cost method for equity securities without readily determinable fair values.
3. Consolidation of financial statements.
4. Equity method.
The financial statement reporting for a particular investment depends primarily on the
degree of influence that the investor (stockholder) has over the investee, a factor most
often indicated by the relative size of ownership.1 Because voting power typically accom-
panies ownership of equity shares, influence increases with the relative size of ownership.
The resulting influence can be very little, a significant amount, or, in some cases, com-
plete control.
Fair-Value Method
In many instances, an investor possesses only a small percentage of an investee company’s
outstanding stock, perhaps only a few shares. Because of the limited level of ownership, the
investor cannot expect to significantly affect the investee’s operations or decision making.
These shares are bought in anticipation of cash dividends or in appreciation of stock market
values. Such investments are recorded at cost and periodically adjusted to fair value accord-
ing to the Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic 321, “Investments—Equity Securities.”
Fair value is defined by the ASC (Master Glossary) as the “price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date.” For most investments in equity securities, quoted stock market
prices represent fair values.
Because a full coverage of limited ownership investments in equity securities is presented
in intermediate accounting textbooks, only the following basic principles are noted here:
∙ Initial investments in equity securities are recorded at cost and subsequently adjusted to
fair value if fair value is readily determinable (typically by reference to market value);
otherwise, the investment remains at cost.
∙ Changes in the fair values of equity securities during a reporting period are recognized as
income.2
∙ Dividends declared on the equity securities are recognized as income.
The above procedures are followed for equity security investments (with readily determinable
fair values) when the owner possesses neither significant influence nor control.
Cost Method (Investments in Equity Securities without Readily
Determinable Fair Values)
When the fair value of an investment in equity securities is not readily determinable, and the
investment provides neither significant influence nor control, the investment may be mea-
sured at cost. Such investments sometimes can be found in ownership shares of firms that are
not publicly traded or experience only infrequent trades.
1
The relative size of ownership is most often the key factor in assessing one company’s degree of influ-
ence over another. However, as discussed later in this chapter, other factors (e.g., contractual relationships
between firms) can also provide influence or control over firms regardless of the percentage of shares
owned.
2
FASB Accounting Standards Update (ASU) No. 2016-01, Financial Instruments—Overall, requires equity
investments (except those accounted for under the equity method of accounting or those that result in con-
solidation of the investee) to be measured at fair value with changes in fair value recognized in net income,
unless fair values are not readily determinable. Thus, the previous available-for-sale category with fair value
changes recorded in other comprehensive income will no longer be available. The ASU is effective for fiscal
years beginning after December 15, 2017, with early adoption permitted.
 The Equity Method of Accounting for Investments 3

Investments in equity securities that employ the cost method often continue to be reported
at their original cost over time.3 Income from cost method equity investments usually consists
of the investor’s share of dividends declared by the investee. However, despite its emphasis
on cost measurements, GAAP allows for two fair value assessments that may affect cost
method amounts reported on the balance sheet and the income statement.
∙ First, cost method equity investments periodically must be assessed for impairment to
determine if the fair value of the investment is less than its carrying amount. The ASC
allows a qualitative assessment to determine if impairment is likely.4 Because the fair
value of a cost method equity investment is not readily available (by definition), if impair-
ment is deemed likely, an entity must estimate a fair value for the investment to measure
the amount (if any) of the impairment loss.
∙ Second, ASC (321-10-35-2) allows for recognition of “observable price changes in orderly
transactions for the identical or a similar investment of the same issuer.” Any unrealized
holding gains (or losses) from these observable price changes are included in earnings
with a corresponding adjustment to the investment account. So even if equity shares are
only infrequently traded (and thus fair value is not readily determinable), such trades
can provide a basis for financial statement recognition under the cost method for equity
investments.

Consolidation of Financial Statements

Many corporate investors acquire enough shares to gain actual control over an investee’s
operations. In financial accounting, such control may be achieved when a stockholder accu-
mulates more than 50 percent of an organization’s outstanding voting stock. At that point,
rather than simply influencing the investee’s decisions, the investor often can direct the entire
decision-making process. A review of the financial statements of America’s largest organiza-
tions indicates that legal control of one or more subsidiary companies is an almost universal
practice. PepsiCo, Inc., as just one example, holds a majority interest in the voting stock of
literally hundreds of corporations.
Investor control over an investee presents a special accounting challenge. Normally, when
a majority of voting stock is held, the investor-investee relationship is so closely connected
that the two corporations are viewed as a single entity for reporting purposes.5 Hence, an
entirely different set of accounting procedures is applicable. Control generally requires the
consolidation of the accounting information produced by the individual companies. Thus, a
single set of financial statements is created for external reporting purposes with all assets,
liabilities, revenues, and expenses brought together. The various procedures applied within
this consolidation process are examined in subsequent chapters of this textbook.
The FASB ASC Section 810-10-05 on variable interest entities expands the use of con-
solidated financial statements to include entities that are financially controlled through
special contractual arrangements rather than through voting stock interests. Prior to the
accounting requirements for variable interest entities, many firms (e.g., Enron) avoided
consolidation of entities that they owned little or no voting stock in but otherwise con-
trolled through special contracts. These entities were frequently referred to as “special pur-
pose entities (SPEs)” and provided vehicles for some firms to keep large amounts of assets
and liabilities off their consolidated financial statements. Accounting for these entities is
discussed in Chapters 2 and 6.

3
Dividends received in excess of earnings subsequent to the date of investment are considered returns of
the investment and are recorded as reductions of cost of the investment.
4
Impairment indicators include assessments of earnings performance, economic environment, going-
concern ability, etc. If the qualitative assessment does not indicate impairment, no further testing is required.
If an equity security without a readily determinable fair value is impaired, the investor recognizes the differ-
ence between the investment’s fair value and carrying amount as an impairment loss in net income (ASC
321-10-35-3).
5
As discussed in Chapter 2, ownership of a majority voting interest in an investee does not always lead to
consolidated financial statements.
4 Chapter 1

Discussion Question
DID THE COST METHOD INVITE EARNINGS MANIPULATION?
Prior to GAAP for equity method investments, firms used the cost method to account for their
unconsolidated investments in common stock regardless of the presence of significant influ-
ence. Under the cost method, when the investee declares a dividend, the investor records
“dividend income.” The investment account typically remains at its original cost—hence the
term cost method.
Many firms’ compensation plans reward managers based on reported annual income. How
might the use of the cost method of accounting for significant influence investments have
resulted in unintended wealth transfers from owners to managers? Do the equity or fair-value
methods provide similar incentives?

Equity Method
Another investment relationship is appropriately accounted for using the equity method. In
many investments, although control is not achieved, the degree of ownership indicates the
ability of the investor to exercise significant influence over the investee. Recall Coca-Cola’s
28 percent investment in Coca-Cola FEMSA’s voting stock. Through its ownership, Coca-
Cola can undoubtedly influence Coca-Cola FEMSA’s decisions and operations.
To provide objective reporting for investments with significant influence, FASB ASC
Topic 323, “Investments—Equity Method and Joint Ventures,” describes the use of the equity
method. The equity method employs the accrual basis for recognizing the investor’s share of
investee income. Accordingly, the investor recognizes income as it is earned by the investee.
As noted in FASB ASC (para. 323-10-05-5), because of its significant influence over the
investee, the investor

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 earnings or losses of the investee.

Furthermore, under the equity method, the investor records its share of investee dividends
declared as a decrease in the investment account, not as income.
In today’s business world, many corporations hold significant ownership interests in
other companies without having actual control. The Coca-Cola Company, for example,
owns between 20 and 50 percent of several bottling companies, both domestic and interna-
tional. Many other investments represent joint ventures in which two or more companies
form a new enterprise to carry out a specified operating purpose. For example, Ford Motor
Company and Sollers formed FordSollers, a passenger and commercial vehicle manufac-
turing, import, and distribution company in Russia. Each partner owns 50 percent of the
joint venture. For each of these investments, the investors do not possess absolute control
because they hold less than a majority of the voting stock. Thus, the preparation of consol-
idated financial statements is inappropriate. However, the large percentage of ownership
indicates that each investor possesses some ability to affect the investee’s decision-
making process.
Finally, as discussed at the end of this chapter, firms may elect a fair-value option in their
financial reporting for certain financial assets and financial liabilities. Among the qualify-
ing financial assets for fair-value reporting are significant influence investments otherwise
accounted for by the equity method.

LO 1-2
Identify the sole criterion for
applying the equity method
of accounting and guidance in
assessing whether the criterion
is met.
The Equity Method of Accounting for Investments 5
International Accounting Standard
28—Investments in Associates
The International Accounting Standards Board (IASB), similar to the FASB, recognizes the
need to take into account the significant influence that can occur when one firm holds a cer-
tain amount of voting shares of another. The IASB defines significant influence as the power
to participate in the financial and operating policy decisions of the investee, but it is not con-
trol or joint control over those policies. The following describes the basics of the equity
method in International Accounting Standard (IAS) 28:6
If an investor holds, directly or indirectly (e.g., through subsidiaries), 20 per cent or more of the
voting power of the investee, it is presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or
indirectly (e.g., through subsidiaries), less than 20 per cent of the voting power of the investee,
it is presumed that the investor does not have significant influence, unless such influence can be
clearly demonstrated. A substantial or majority ownership by another investor does not neces-
sarily preclude an investor from having significant influence.
Under the equity method, the investment in an associate is initially recognised at cost and
the carrying amount is increased or decreased to recognise the investor’s share of the profit or
loss of the investee after the date of acquisition. The investor’s share of the profit or loss of the
investee is recognised in the investor’s profit or loss. Distributions received from an investee
reduce the carrying amount of the investment.
As seen from the above excerpt from IAS 28, the equity method concepts and applications
described are virtually identical to those prescribed by the FASB ASC.
Application of the Equity Method
An understanding of the equity method is best gained by initially examining the FASB’s
treatment of two questions:
1. What factors indicate when the equity method should be used for an investment in another
entity’s ownership securities?
2. How should the investor report this investment and the income generated by it to reflect
the relationship between the two entities?
Criteria for Utilizing the Equity Method
The rationale underlying the equity method is that an investor begins to gain the ability to
influence the decision-making process of an investee as the level of ownership rises. Accord-
ing to FASB ASC Topic 323 on equity method investments, achieving this “ability to exer-
cise significant influence over operating and financial policies of an investee even though
the investor holds 50 percent or less of the common stock” is the sole criterion for requiring
application of the equity method [FASB ASC (para. 323-10-15-3)].
Clearly, a term such as the ability to exercise significant influence is nebulous and subject
to a variety of judgments and interpretations in practice. At what point does the acquisition of
one additional share of stock give an owner the ability to exercise significant influence? This
decision becomes even more difficult in that only the ability to exercise significant influence
need be present. There is no requirement that any actual influence must ever be applied.
FASB ASC Topic 323 provides guidance to the accountant by listing several conditions
that indicate the presence of this degree of influence:
∙ Investor representation on the board of directors of the investee.
∙ Investor participation in the policy-making process of the investee.
∙ Material intra-entity transactions.
6
International Accounting Standards Board, IAS 28, “Investments in Associates,” Technical Summary
(www.iasb.org).
6 Chapter 1

∙ Interchange of managerial personnel.

∙ Technological dependency.
∙ Extent of ownership by the investor in relation to the size and concentration of other own-
ership interests in the investee.
No single one of these guides should be used exclusively in assessing the applicability of the
equity method. Instead, all are evaluated together to determine the presence or absence of the
sole criterion: the ability to exercise significant influence over the investee.
These guidelines alone do not eliminate the leeway available to each investor when decid-
ing whether the use of the equity method is appropriate. To provide a degree of consistency
in applying this standard, the FASB provides a general ownership test: If an investor holds
between 20 and 50 percent of the voting stock of the investee, significant influence is normally
assumed and the equity method is applied.
An investment (direct or indirect) of 20 percent or more of the voting stock of an investee shall
lead to a presumption that in the absence of predominant evidence to the contrary an investor
has the ability to exercise significant influence over an investee. Conversely, an investment of
less than 20 percent of the voting stock of an investee shall lead to a presumption that an inves-
tor does not have the ability to exercise significant influence unless such ability can be
demonstrated.7

Limitations of Equity Method Applicability

At first, the 20 to 50 percent rule may appear to be an arbitrarily chosen boundary range
established merely to provide a consistent method of reporting for investments. However, the
essential criterion is still the ability to significantly influence (but not control) the investee,
rather than 20 to 50 percent ownership. If the absence of this ability is proven (or control
exists), the equity method should not be applied regardless of the percentage of shares held.
For example, the equity method is not appropriate for investments that demonstrate any of
the following characteristics regardless of the investor’s degree of ownership:8
∙ An agreement exists between investor and investee by which the investor surrenders sig-
nificant rights as a shareholder.
∙ A concentration of ownership operates the investee without regard for the views of the
investor.
∙ The investor attempts but fails to obtain representation on the investee’s board of directors.
In each of these situations, because the investor is unable to exercise significant influence
over its investee, the equity method is not applied.
Alternatively, if an entity can exercise control over its investee, regardless of its ownership
level, consolidation (rather than the equity method) is appropriate. FASB ASC (para. 810-10-
05-8) limits the use of the equity method by expanding the definition of a controlling financial
interest and addresses situations in which financial control exists absent majority ownership
interest. In these situations, control is achieved through contractual and other arrangements
called variable interests.
To illustrate, one firm may create a separate legal entity in which it holds less than 50 per-
cent of the voting interests but nonetheless controls that entity through governance document
provisions and/or contracts that specify decision-making power and the distribution of profits
and losses. Entities controlled in this fashion are typically designated as variable interest enti-
ties, and their sponsoring firm may be required to include them in consolidated financial
reports despite the fact that ownership is less than 50 percent. For example, the Walt Disney
Company reclassified several former equity method investees as variable interest entities and
now consolidates these investments.9

7
FASB ASC (para. 323-10-15-8).
8
FASB ASC (para. 323-10-15-10). This paragraph deals specifically with limits to using the equity method for
investments in which the owner holds 20 to 50 percent of the outstanding shares.
9
Chapters 2 and 6 provide further discussions of variable interest entities.
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the beginning of his missionary career, and as he unswervingly
adhered to them all the rest of his life. He disclaimed any intention to
exalt education as a missionary agency above other
instrumentalities, and especially not above preaching the gospel;
and claimed for it only its legitimate place. As to this he laid down
and elaborated certain great principles involved in the nature of the
case and verified by experience. Education, he said, is important in
order to provide an effective and reliable ministry; to furnish teachers
for Christian schools, and through them to introduce into China the
superior education of the West; to prepare men to take the lead in
introducing into China the science and arts of western civilization, as
the best means of gaining access to the higher classes in China, of
giving to the native church self-reliance, and of fortifying her against
the encroachments of superstition from within and the attacks of
educated skepticism from without. On the last of these propositions
he enlarged with wise foresight:

So long as all the Christian literature of China is the work of

foreigners, so long will the Chinese church be weak and
dependent. She needs as rapidly as possible a class of
ministers with well-trained and well-furnished minds, who will
be able to write books, defending and enforcing the doctrines
of Christianity, and applying them to the circumstances of the
church in China.... Again, as native Christians increase in
numbers, and spread into the interior, they will pass more and
more from under the direct teaching and control of foreigners.
Then will arise danger from the encroachment of heathen
superstition, and from the baneful influence of the Chinese
classics. Superstitions of all kinds find a congenial soil in the
human heart, and they often change their forms without
changing their nature. The multiform superstitions of China
will not die easily; and unless they are constantly resisted and
ferreted out and exposed, they will commingle with
Christianity and defile it.... The day is not distant when the
skepticism of the West will find its way into China. The day
when it shall be rampant is not so distant as might be
supposed. Error is generally as fleet-footed as truth. To repel
 these attacks, and vindicate the truth in the face of heathen
unbelief, will require a high order of education. An uneducated
Christianity may hold its own against an uneducated
heathenism, but it cannot against an educated heathenism.
We want, in a word, to do more than introduce naked
Christianity into China, we want to introduce it in such a form,
and with such weapons and supports, as will enable it to go
forward alone, maintain its own purity, and defend itself from
all foes.

In view of these ideals with regard to the object of such schools,

he concluded his paper by urging that they should be of an
advanced grade rather than primary, though not excluding the
primary; that the natural sciences should be made prominent in the
instruction; and that the pupils should be of Christian parentage,
rather than of heathen. His prophecy as to skeptical books from the
West is already in process of fulfillment.
It needs to be recognized that the substance of all this was in his
mind when he opened that little elementary school. But he had to
begin with something that fell almost pitifully short of his ideal. The
first thing that was necessary was to secure a few pupils under
conditions that made it worth while, in view of his object, to teach
them. One of these conditions was that the parents of the boys
should formally bind themselves to leave them in the school six or
seven years, so that they might finish the studies prescribed.
Otherwise they would stay only as long as suited them or their
parents, and they would all the while be exposed to heathen
influences that likely would nullify the Christian instruction received.
On the other hand, this arrangement made it necessary for the
school to furnish gratuitously not only the buildings and the teachers,
but the food and lodging and clothes of the pupils. Gradually this was
so far modified that the parents provided their clothes and bedding
and books. To meet the running expenses of the school the average
cost of each pupil was ascertained, and an effort was made to
secure from Sabbath schools in the United Stales a contribution of
that amount. The plan of designating a particular boy for support by
a particular Sabbath school was suggested from home for
consideration, but was discouraged, on the ground that it might often
prove disappointing, through the uncertainties as to the conduct of
the boy; and it was rarely, if at all, practiced. In order to secure these
contributions each year a letter had to be carefully prepared, and
then duplicated, at first by hand, and later by lithographing process,
and sent to the Sabbath schools that shared in giving for this
purpose. These letters were of a very high order, taking for the
theme of each some important phase of Chinese life and manners or
of mission work. They might to advantage have been gathered into a
volume; and if this had been done, it would be entitled to rank with
books of the very best kind on the same general subject. The
preparation of these letters and their multiplication and distribution
cost very considerable time and labor; to lighten this for her
husband, Julia rendered valuable assistance, even to the extent
eventually of taking upon herself the entire work, except the printing.
The average expense of a boy was at first estimated at forty
dollars, but with the rise of prices as the years went by, this estimate
had to be raised. The scheme worked well enough to enable the
school not only to go on, but gradually to increase its numbers as
other events opened the way. Nor was there any difficulty in
obtaining all the pupils that could be accommodated. At the
beginning all were from families who were too poor to educate their
boys in native schools, and to whom the fact that in addition to the
good education received, their boy was also clothed and fed, proved
inducement sufficient to overcome the opprobrium of allowing him to
fall under the influence of the hated foreigner. It really meant no little
in those early days, and, in fact, in all ante-Boxer times, for parents,
even though Christians, to send their boys to the Tengchow school.
An honored native pastor who was at one time a pupil there wrote:

When my parents first sent me to school, there was a great

protest from all the village. They tried to scare my mother by
saying that the foreigners were vampires who could extract
the blood of children by magic arts. Nevertheless I was sent;
though I must own that I was a little scared myself. When I
 came home at Chinese New Year vacation, I was most
carefully examined by all these prophets of evil; and when
they found that not only my pulse was still a-going, but that I
was even rosier and in better flesh than before, they said that
the three months I had been there were not enough to show
the baneful results; only wait! After the Germans took
Kiaochow and began the railroad, the rumors in that region
became worse. Under each sleeper a Chinese child must be
buried. To furnish axle grease for the “fire-cart” human fat
must be tried out—anyone could see the great boilers they
had for the purpose; and under those great heaps of fresh-
turned earth they buried the bones.

At the time of the Tientsin massacre it was currently reported that

Mateer was fattening boys for the purpose of killing them, and then
taking their eyes and hearts to make medicine with which to bewitch
the people.
Nevertheless the numbers were always full, except at brief
intervals, when reduced by popular disturbances, epidemics or such
causes. The school in its second year had twelve pupils, just double
the number with which it began its work. It will be remembered that
in 1867 the Mateers built and occupied their new home. This vacated
the old Kwan Yin temple premises. In the application to the Board to
erect the new home Mateer said:

We do not propose to vacate the old premises, but to

appropriate them to the school, for which they would be
admirably adapted. We look forward with confidence to an
increase of the school. Our present number of scholars,
however, occupy all the room we can possibly spare; if we
increase we must build not only sleeping rooms, but a large
schoolroom. This would not, it is true, cost as much money as
a foreign house, but it would not come as far below as
perhaps you might suppose. The main building would make
one or two most admirable schoolrooms, which will
accommodate any school we will likely ever have. One of the
 side buildings would make a very convenient dining room and
kitchen, and the other, with additional buildings made vacant,
would with a very little refitting furnish at least ten new rooms
besides what we now have. It will probably be many years
before we will have more than these.

With all his largeness of vision he did not yet foresee the coming
Tengchow college; though he was planning for greater things for the
mission as well as for the health and comfort of himself and wife.
Because the language employed was solely Chinese, at the
beginning neither Mateer nor his wife could take part in the
instruction; all had to be done by the Chinese assistant, who was a
professing Christian. It was not long, however, until both the Mateers
were able to help; though at no time did he give himself exclusively
to teaching. The boys were taught to read and write in their own
language, so that for themselves they might be able to study the
Bible and other books which they were expected to use. Arithmetic
was a part of this course in the elementary department with which
the school began, and it was one of the very first of the branches of
which Mateer took charge. Mrs. Mateer had a class in geography,
and widened their vision of the world by informing them of other
lands besides China. Three times a week she undertook the
peculiarly difficult task of instructing them to sing. Of course, there
was morning worship. This was held in the schoolroom. The service
consisted of a hymn, of a chapter in the New Testament read verse
about, and a prayer. There was also evening worship. On Sabbath
morning all attended the little native chapel. In the afternoon a sort of
Sunday school was held, and in it Mateer taught the bigger boys,
and Mrs. Mateer the smaller, in the Scriptures. At worship on
Sabbath evening he questioned them all in turn about the sermon in
the morning. Such was the very humble way in which the school was
nurtured in its infancy, and started on the road to become what has
been pronounced to be the very best of all the colleges in China.
Three months after the first opening the six pupils admitted were
reduced to three, because the fathers of the other boys were
unwilling to sign the obligation to leave them in the school the
required number of years. A decade after the school was begun
Mateer said in a Sunday-school letter:

Our boys are from nine or ten to eighteen or twenty years,

and a number of them have been in school seven or eight
years. If they have never been to school, we require them to
come for twelve years, but take them for a less time if they
have already been several years in a native school. We try to
get those who have already been to school, as it is a saving
both of labor and of money.

At the end of a quarter of a century after the school was begun he

said:

During these years we took many boys into the school who
came to nothing. Some were too stupid, and we had to send
them away after they had learned to read and knew
something of the Bible. Others were bad boys, and we had to
dismiss them; and some got tired and ran away, or were
taken away by their parents because they wanted them at
home to work. We sifted out some good ones, who were
bright and promised to make good men.

The pupils they retained at the end of the first ten years were
culled out of more than twice their number. Of the routine of the
school he wrote:

The boys go to school at six o’clock in the morning, and

study till eight. Then all meet in the large schoolroom for
prayers. After this there is a recess of an hour for breakfast.
At half-past nine they go to school again, and remain till half-
past twelve. In the afternoon they have another session of
four hours. During the shortest days of winter they have an
evening session instead of a morning session. These are the
ordinary hours of study in the native schools. At first we
thought so many hours in school too much for either health or
profit, but after trying our plan for several years, we were
convinced that for Chinese children and Chinese methods of
study the native plan is best. The great business in Chinese
schools is committing the classics, which they do by chanting
them over rhythmically at the top of their voices, each one
singing a tune of his own, and apparently trying to “hollow”
louder than the others. The din they make would be
distracting to one of us, but the Chinese teacher seems to
enjoy it. The exercise it gives the lungs compensates,
perhaps, for the want of more play hours. When Mrs. Mateer
or I go into the school to hear classes, we, of course, make
them stop their uproarious studying, and study to themselves.
About half the day our boys devote to Christian and to
scientific books. They learn a catechism of Christian doctrine,
“The Peep of Day,” Old Testament history, “Pilgrim’s
Progress,” “Evidences of Christianity,” and memorize portions
of Scripture. They study also geography, ancient history,
arithmetic, algebra, geometry, trigonometry, natural
philosophy, and chemistry. They are trained in singing, writing
essays, and debating. The native books which they study are
composed mostly of the maxims and wise sayings of
Confucius and Mencius, together with a large number of
poems. These books teach people to be honest and upright.
They teach children to obey their parents and elder brothers.
They also contain a great deal about the duties of the people
to their rulers, and of the rulers to the people. They praise all
good and virtuous men, and exhort all to lead virtuous lives;
but they offer no motives higher than the praise of men. They
teach nothing about God or future life. They are all written in
what is called the classical style, which is to a Chinese boy
what Latin is to an American boy. These books the boys
commit to memory, and recite to their teacher, but without
understanding them. When a book has been memorized and
a boy can repeat it from beginning to end, the teacher
commences to explain it to him. He has neither grammar nor
dictionary to help him, but must learn all from the teacher’s
lips. When a young man can repeat all these books and give
 the explanation, and can write an essay in the same style, the
Chinese consider him a scholar, and when he can do this,
and in addition has mastered all the other branches of study
mentioned above, we consider his education finished, and he
graduates from our school. A boy must have a good mind,
and be very diligent if he gets through in twelve years.

The clothes of the boys, of course, were entirely Chinese as to

material and style. Their food was of like character. The dormitories
were low rooms with earthen floors and the bedsteads were of dry
mud. The letter continues:

Teaching the boys their regular lessons is but a small part

of the work to be done in such a school as ours. Ways and
means have to be provided to have their food bought and
properly cooked. The cook must be prevented from stealing it,
and the boys from wasting it. Their clothes have to be made
in proper season, and mended and washed, and the boys
watched that they do not destroy them. Then each boy’s
grievances have to be heard and his quarrels examined into
and settled. Bad boys have to be exhorted or reproved, and
perhaps punished and every possible means used, and that
constantly, to make the boys obedient and truthful and
honest. We also strive to train them to habits of industry,
perseverance, and self-reliance, without which their education
will do them no good. Thus you see that to train up these
boys so that they shall become good and useful men requires
a great deal of labor, patience, and faith, and prayer.
 Large College Building End of Chapel College Bell
(formerly Kwan Yin Temple) Small Schoolroom

These are homely details, but we cannot overlook them, and

understand the life of the Mateers in its connection with this work.
Discipline in any school composed of so many boys and of such
varied age could not be an easy task; in this Chinese school it was
peculiarly perplexing. There were some unusual incidents.
Falsehood, stealing, quarreling, gluttony, and even sodomy were
offenses that had to be dealt with according to the circumstances
attending each case. One instance of discipline was so distinctively
Chinese that the description of it by Mateer in his Journal deserves a
place here. Under date of April 9, 1869, he wrote:

One very distressing thing has happened within a month.

Leon Chin Chi was being persecuted by his father in relation
to the matter of his marriage engagement with Shang Yuin,
 when in a fit of desperation he went and bought opium, and
took it to kill himself. Some of the boys suspected him, and
went to see. They found him lying on his bed evidently in
great distress of mind, and refusing to answer any questions
save to say that his affairs were all over with. I inferred from
this, as also from his saying to one of the boys that he would
never see him again, that he had taken poison—most likely
opium. I went and got a strong emetic, and mixed it up, but he
refused to take it. I then got a stick and used it to such good
purpose that in a very short time he was glad to take the
medicine. It had the desired effect, and in a very short time he
vomited up the opium. He seemed to lay the beating to heart
very much. It was evidently a new idea to him to be put
through in such a style. After a day or two, when he had gone
to school again, I gave him a formal and severe whipping in
the presence of the school. I thought very seriously over the
matter of whipping him, and concluded that it was my duty to
do it. I believe now that it did the boy good. He was called
before the session last week, when he manifested a good
deal of sorrow and penitence. He was publicly reproved and
admonished on Sabbath morning. I am sorry that he had such
a weakness; it greatly decreases my reliance on him, and my
belief in his genuine Christian character. It must be allowed
that there is some little excuse, in the way in which the
Chinese all regard suicide. He had not got those ideas all
educated out of him.

While Mateer differed in opinion from those missionaries who

favored schools simply as effective agents for the conversion of the
pupils, he regarded this as one of the leading results to be sought
and expected. It was almost two years after the opening of his
school when he had the great joy of baptizing one of the pupils. In
describing the event to a secretary of the Board, he said:

He is the oldest boy in the school, and is in fact a man in

years, though his education is not yet nearly finished. He has
 been for two or three months feeling that it was his duty to
profess Christ, but, as he is naturally modest and retiring, he
did not make his wish known. His mother, to whom he was
uncommonly attached, died recently, and this brought him to
a full decision. His examination before the session was most
satisfactory, showing that he has improved well his
opportunities of learning the truth. I have great hopes of his
future usefulness. He has a good mind, and is a most diligent
student, and if he is spared, and is taught of God’s Spirit he
may be a great treasure to us in preaching to the heathen.

Three months later he wrote again of this young man as

exemplary in conduct and as growing in grace, and added:

I am thankful that I can now say that another has since

been baptized. He is the most advanced boy in the school,
and is in fact very nearly a man. His conversion was not
sudden, but gradual, after the manner of almost all the
Chinese. We trust, however, that he is a true child of God,
and we have strong hope that if he is spared he will make a
very useful man.

The next year three more of the largest boys were received into
the church. The session examined two others, but thought it best for
them to wait a few weeks; and a number more were hoping to be
received, but were advised to defer the matter. Thus the conversion
of the boys gradually progressed, until at the time when the school
formally became a college, all who had graduated, and nearly all the
pupils still enrolled who were sufficiently mature, were professing
Christians.
Julia’s sister, Maggie Brown, came out to join the station at
Tengchow early enough to render valuable help in the initial stages
of the school. In 1871 she married Mr. Capp. One of the necessities
which Mateer recognized was that of a girls’ school, his reason being
the vital importance of providing suitable wives for the young men
whom he was training. After her marriage Mrs. Capp took charge of
such a school, and she and her brother-in-law, Mateer, continued to
coöperate in that important enterprise. For use in teaching she
translated a mental arithmetic, and in this she had his assistance. Dr.
Corbett wrote: “In spite of all discouragements in the way of securing
permanent and efficient heads, and of the paucity of results, he
never wavered in his support of the girls’ school, and always planned
for its welfare, because he saw in it an element necessary to the final
success of the Christian Church.” When Mrs. Capp died, she left her
little all for the erection of buildings to be used by the school which
he had encouraged, and to which she had consecrated the maturity
of her powers.
Thirteen years went by before any of the young men graduated.
The first class consisted of three men who had completed the
course, which by that time had been enlarged beyond the curriculum
already described so as to include astronomy, the text-book used
being a good, stiff one,—no other than a translation of Herschell’s
work. Of that first class Mateer said: “They will probably teach for a
time at least. There is more call for teachers than for preachers at
present.” Under date of May 2, 1877, he wrote as to this first
commencement:

We had a communion on the occasion. The speeches

made by the young men at graduation were excellent, and the
whole effect on the school was most happy. The boys saw
distinctly that there is a definite goal before them and their
ambition was stirred to reach it.

The report for that year speaks as follows:

All of the graduates are men of excellent talents. They are

really fine scholars both in their own language and literature
and in western science. One of them goes to Hangchow to
take charge of the mission school there,—a school which had
flourished well-nigh twenty years before the school in
Tengchow was born. Another of them goes to Chefoo, to
teach a school for the Scottish Presbyterian mission. The third
 goes to assist Dr. Nevius in his extensive country work, where
I am sure he will render the most valuable service. One of our
former pupils, who has been teaching in the school during the
last year, also goes to assist Dr. Nevius in the same way. This
he does of his own free will, knowing that he will have harder
work and less pay. We expect a large number of new pupils
next year. More are anxious to come than we can take. We
will try to do the best we can.

From May, 1879, to January, 1881, the Mateers were absent from
China, on their first furlough home. During this period the school was
in charge of other missionaries, and a part of the time was without a
regular superintendent; yet it continued its work fairly well. The return
of the Mateers was made the occasion of a reception that must have
been exceedingly pleasant to them. In the Sunday-school letter for
1881 he described it:

From Chefoo to Tengchow we traveled in a shentza. The

weather was cold and the ground covered with snow. We got
along comfortably, however, and reached Tengchow in safety.
The schoolboys had heard of our coming, and were all on the
lookout to meet us. It was Saturday afternoon, and they had
no school; so they all came out of the city to meet us on the
road. They met us in companies, and their beaming faces and
hearty expressions of delight made us feel that we were
indeed welcome back to Tengchow. Their faces looked very
familiar, though some of the smaller boys had grown very
much during our absence. The next week the school closed
for the year.

Late in 1881 they were gladdened by the arrival of Robert Mateer

and Lillian as reënforcements to the mission. Robert has been one of
the most efficient of the Presbyterian missionaries in Shantung,
especially in evangelism, and is still doing most excellent work.
Lillian was attractive in person and proved herself an accomplished
and successful teacher. In the course of time she married Mr.
Samuel Walker. The failure of his health compelled their return
home.
The year 1882 seems to have been marked by a distinct advance
all along the line. The average attendance rose to sixty-five. The new
students were selected out of the possible admissions, and
consisted of such as gave most promise as to work and character,
some of them being already well advanced in their studies, and full-
grown men. The secret of this was the enlargement of the
constituency of the institution, through the reputation it had already
won for itself among the Chinese in general, and through the
increase of native Christians. Perhaps the most remarkable
improvement was in the prosecution of their work by the students; a
state of things due to such causes as the presence of a larger
number of select and advanced pupils, with a fuller and higher and
prescribed curriculum, with formal public graduation at its
completion.
So straitened had their quarters become that in the following year
another building was obtained, care being taken that its outfit should,
as heretofore, be of so plain a character as not to lift the men who
went out from the institution above their own people in their ideas
and habits of living. Of course, the growth of the school and its
differentiation according to the stages of the curriculum necessitated
a considerable increase in the force of teachers. After graduates
began to go out, several of these were employed. Lillian Mateer for a
while helped in the school, but it was not long until her marriage to
Mr. Walker terminated her connection with the Presbyterian work and
her residence at Tengchow. In the autumn of 1882 very substantial
and permanent help came by the arrival of Mr. and Mrs. W. M.
Hayes, whose large services will require further notice as this
biography proceeds. Were it not that the story of the life of Mrs. Julia
Mateer is told fully in a suitable volume, much would be said here as
to her remarkable achievements, especially in the school.
Mateer’s work in connection with the school lay only in part in the
classroom; but whatever shape it took, it was always of such a
character as to impress his own individuality in a remarkable degree.
Both he and Julia regarded personal influence as of such vital
importance that they were not quite prepared to welcome an
increase of pupils so great as to hazard this element of training. Dr.
Corbett says: “As a teacher he was enthusiastic and eminently
successful. He was always wide-awake and never dull; so he was
able to keep the attention of every student. Any attempt to deceive
him was useless, and students found no comfort in going to a
recitation unless they had been faithful in their preparation.” The
truth is that, helpful as he gladly made himself to everybody who
tried to conduct himself as he ought, he was a terror to all triflers and
evildoers, old or young. Dr. Mateer’s surname in Chinese was Ti.
The tiger is called Lao Hu. It is significant that among themselves his
students sometimes spoke of him as Ti Lao Hu. One thing he
believed with his whole heart, and endeavored to impress in every
legitimate way on his pupils. This is that the highest office to which a
Christian man can be called is the ministry of the gospel. In all his
conduct of the school his dominating desire was to raise up faithful,
able, well-educated men, filled with the Spirit, to go forth as
ambassadors of Christ to win China for Him. As Dr. Corbett adds:
“For this purpose he gave wise counsel, intellectual effort, unceasing
toil and daily prayer. He gave of his own money freely to help the
destitute, and make it possible for youths of promise to fit
themselves for usefulness.”
Such, briefly told, is the story of the Tengchow school. In the two
decades of its existence it had fully justified the consecrated wisdom
of its founder and head. From the little elementary department with
which it had opened, it had advanced so as to become also a high
school, and at length to do work of full collegiate rank. At the time
when it formally took the name of a college, there was an average
attendance of seventy-five, including three day scholars. It had
educated more or less completely perhaps two hundred pupils, who
had come up from Chinese families, some of them Christian and
many of them heathen. Of those who remained long enough to be
molded by the influences of the institution and were mature enough,
all made a public profession of their faith in Christ. They had been
trained to live upright, godly, Christian lives; and they had seen one
of their number die in peace through his faith in Christ. The character
and the work of those who had gone out to do their part in the
activities of the world were such as to command respect and
confidence and influence. For the graduates who were beginning to
be sent forth there was a demand to fill positions of high importance,
much in excess of the supply, and by no means limited to Shantung.
Besides all that had been achieved, the prospect of far greater things
in the future was assured.
 IX
THE PRESS; LITERARY LABORS

“Making books is a very important branch of missionary effort, which I

would by no means depreciate; but he who would undertake it should
be sure of his call, and should not begin too soon. There is a
temptation to forego active evangelistic work for the less laborious
and perhaps more congenial work of sitting in a study, translating or
studying the literature of the language. Much precious time is
sometimes wasted in this way, especially in the earlier stages of a
man’s life, before he is quite able to weigh himself against his work. It
is a rare thing indeed that a missionary should undertake writing or
translating a book inside of five years, and then he should be
supported by the advice and approval of his older associates.”—
missionaries and the language, 1902.

Mateer was at no time a very prolific contributor to the home

newspapers and periodicals. For about ten years, with some
frequency, he wrote for “The Presbyterian Banner” letters concerning
the work of the mission done by himself and others in China; but
after that he was too busy to continue such writing, except at long
intervals. Once or twice he sent to the United States more labored
replies to what he considered misleading articles that had appeared
in such periodicals as “The Princeton Review,” in regard to the
condition of things in China. He greatly deprecated laudation of
matters Chinese and unwarranted hopefulness as to the immediate
future of their country. He was strongly inclined to question the
wisdom of the policy which the United States was pursuing in China
forty or fifty years ago, and he did not hesitate to express in print
here at home his views on that line of topics. Beyond these fugitive
contributions to the newspapers and periodicals he published little
else in this country, save a booklet or two, one or more of which he
prepared for the use of the Board at their request. Sometimes he
questioned whether his slight use of the home press might not leave
the impression there that he was not doing as much as others who
were more frequent in their contributions; but all the same he gave
himself to the other work which his hands found to do.
Most of his contributions to current literature appeared in China
and were written for “The Chinese Recorder.” His articles in this
periodical extend over almost his entire missionary life, some of
them being brief, but many of them being elaborate discussions of
great subjects affecting directly or indirectly the work of
evangelization in non-Christian lands. His book on the Chinese term
for God was not published until 1902, and, of course, was in English,
though with copious extracts from Chinese literature. His only other
English book was a review of Dr. Nevius’ “Methods of Missions.”
His publications in Chinese, as we shall presently see, were very
considerable in number, and were of large importance to the work of
missions; for he at no time allowed himself to be diverted to the
production of any treatise that would not be helpful in the one service
to which he consecrated his life. But before he began to avail himself
of the press for his own books, he was somewhat unwillingly
compelled for a while to take the management of a printing
establishment. Down at Shanghai there was already a mission
press, the funds for the establishment of which had in large part
been contributed for that distinct purpose, and which had been left
hitherto to the management of the Presbyterian missionaries of that
general region. The Synod of China—by order of the General
Assembly of the Presbyterian Church in the United States—was
organized in the autumn of 1870, and the first meeting was held at
Shanghai. The condition of the mission press at that place was
brought before the synod, and was by that body handed over to the
foreign missionaries in attendance, as more properly belonging to
their control. A plan covering the entire operation of the plant, as
drawn up by Mateer in a committee and approved by the entire body,
was sent home to the Board for sanction, which in due time it
received. One of the things for which immediate provision was
necessary was a man to take charge of the establishment, and the
choice, after repeated efforts to secure some other suitable person,
and after his own refusal to take the place, returned to him in such a
way that he felt that he could not decline it, if limited to a period of a
year, and with the privilege of spending some time as necessary up
at Tengchow. Of course, temporary arrangements had to be made
for the conduct of the school. For this purpose Julia’s sister, Maggie,
was called into service; and with such assistance as she could
command she gave excellent satisfaction. She was also in
possession of the Mateer home. As to the work to which he was thus
temporarily called at Shanghai, he said in his Journal:

While it is a very great trial to me to come to Shanghai, it is

not without some inducement. It will increase very largely my
acquaintance, and will enlarge my knowledge of China and its
affairs. Also I hope it may be the means of getting something
of great benefit done for Julia’s health. I am very sorry that the
doctor who treated her before is not here now. My great
sorrow is that it will interfere with my Chinese studies, and
prevent me accomplishing what I had designed.

It was not until August, 1872, that he finally went back to

Tengchow to resume his work there.
The details of his life while at Shanghai probably would not interest
most readers. He said of it in his Journal, under date of January 29,
1872:

I neglected everything to do the work in the press, and I

worked with an assiduity that I have rarely given to anything in
my life. I had hoped when I went to Shanghai to have some
time to study, but I found it utterly out of the question. The
demands for the press were imperative, and I just gave
myself to the work.

Two sides of his capabilities were there brought into special

requisition. One of these was his efficiency as a business manager,
—a characteristic due partly to his native qualities, and partly to his
habits of accuracy, of wise forethought, of careful oversight, and of
insistence on the faithful performance of duty by all employees. This
side of his character is brought out by his “letter books.” Separation
by the space of half a globe from the base of supplies made it
necessary to anticipate wants by eight or ten months. For convenient
reference he caused every business letter, and many others, to be
copied. Especially as the school and college at Tengchow grew on
his hands he had to conduct what was in reality a large
miscellaneous business, under conditions that were very
exceptionally difficult. He had not only to provide for his own wants in
his family and in his work, but also to accommodate others by acting
as their agent. His orders had to go sometimes to Shanghai, but
more frequently to London, or to New York, or to some place in the
interior of the United States. Many are curiosities, owing to the
nature and the range of articles included—from a steam engine or a
telescope or costly chemical supplies to a paper of pins. Some of the
lists cover more than ten pages in the copy. Woe to the merchant or
agent in London or New York or Shanghai who by mistake or for
other reason sent without adequate explanation any article that was
not quite in accordance with the order! He might expect to get a
sharp letter, and a demand to rectify the mistake if that were
practicable. Service as treasurer of the mission also gave him drill.
Shilly-shally workmen are one of the horrors which sometimes call
from him in his Journal groans of anguish. When he had completed
his charge of the press establishment, including as it did a book
department, a job department, a dwelling for the superintendent,
quarters for the workmen, all of whom were Chinese, a chapel for
these workmen, and other equipments, it was a well-organized
business, running regularly and smoothly, and doing its work about
as efficiently as was possible under the conditions.
The other side of his capabilities there especially called into
exercise was his mechanical gifts. As an illustration, the following
from his Journal, under the same date as that just given, will answer:

I had to get a Japanese dictionary started, and it was a

most embarrassing affair. My predecessor had made
promises which he could not fulfill. The men were there to