09.25 Flashcards
Which of the following is an appropriate income approach for developing fair value measurements?
Using the relevant information from recent transactions
Using present value techniques to discount cash flows
Using the current replacement cost of the asset
Using the undiscounted cash flows from the asset
Using present value techniques to discount cash flows
** An income approach to fair value measurement includes using present value techniques to discount cash flows.
Clark Co.’s advertising expense account had a balance of $146,000 at December 31, 20X3, before any necessary year-end adjustment relating to the following:
Included in the $146,000 is the $15,000 cost of printing catalogs for a sales promotional campaign in January 20X4.
Radio advertisements broadcast during December 20X3 were billed to Clark on January 2, 20X4. Clark paid the $9,000 invoice on January 11, 20X4.
What amount should Clark report as advertising expense in its Income Statement for the year ended December 31, 20X3?
$122,000
$131,000
$140,000
$155,000
$140,000
**advertising expense amount is $146,000 − $15,000 + $9,000 = $140,000. The catalog printing is subtracted because the cost relates to 20X4, not to 20X3. The benefit of this cost will be received in 20X4. The radio advertisements are added because they benefit 20X3, but they were not included in the $146,000 because they were paid in 20X4. Clark was apparently unaware of the cost before 12/31/X3 because the firm was not billed until 20X4.
Which of the following is not an objective of using present value in accounting measurements?
To capture the value of an asset or a liability in the context of a particular entity.
To estimate fair value.
To capture the economic difference between sets of future cash flows.
To capture the elements that taken together would comprise a market price if one existed.
To capture the value of an asset or a liability in the context of a particular entity.
**According to SFAC 7, the objective of using present value in an accounting measurement is to capture, to the extent possible, the economic difference between sets of future cash flows. The objective of present value, when used in accounting measurements at initial recognition and fresh-start measurements, is to estimate fair value. Stated differently, present value should attempt to capture the elements that taken together would comprise a market price, if one existed, that is fair value. Value-in-use and entity-specific measurements attempt to capture the value of an asset or liability in the context of a particular entity. An entity-specific measurement substitutes the entity’s assumptions for those that marketplace participants would make.
What is the underlying concept that supports estimating a fixed asset impairment charge? Substance over form. Consistency. Matching. Faithful representation.
Faithful representation.
**An estimate of an impairment charge to a fixed asset can only be a faithful representation if the entity has applied impairment rules properly, disclosed the process of arriving at the impairment estimate and disclosed any uncertainties that affect the impairment estimate. Assuming the above is true, and no other estimate is better than the derived estimate, then the estimate is comprised of the best available information. Therefore, it is a faithful representation.
Adam Co. reported sales revenue of $2,300,000 in its income statement for the year ended December 31, year 2. Additional information was as follows:
12/31/Y1 12/31/Y2
Accounts receivable $500,000 $650,000
Allowance for uncollectible accounts (30,000) (55,000)
Uncollectible accounts totaling $10,000 were written off during year 2. Under the cash basis of accounting, Adam would have reported year 2 sales of
$2,140,000
$2,150,000
$2,175,000
$2,450,000
$2,140,000
**An increase in receivables ($150,000) means that the amount of cash collected was less than sales, and this amount should be subtracted from accrual basis sales revenue to arrive at the cash basis sales revenue. Also, the $10,000 written off during year 2 means that the 12/31/Y2 receivable balance is $10,000 less than it would have been had no write-offs been made. In other words, this $10,000 represents recognized sales that will not result in the collection of cash and should be subtracted from accrual basis sales to determine cash basis sales revenue. Therefore, Adam should report $2,140,000 ($2,300,000 – $150,000 – $10,000) for year 2 cash basis sales.
IAS 1 requires a complete set of financial statements to be prepared annually. A complete set of financial statements includes
- Statement of financial position, statement of comprehensive income, statement of changes in equity, and notes.
- Statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows.
- Statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes.
- Statement of financial position, statement of changes in equity, statement of cash flows, and notes.
Statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes.
** because a complete set of IFRS financial statements includes the following: statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes.
According to ASC Topic 820, the fair value of an asset should be based upon
The price that would be paid to acquire the asset.
The price that would be paid to replace the asset.
The price that would be received to sell the asset.
The price that the item is appraised at balance sheet date.
The price that would be received to sell the asset.
**ASC Topic 820 requires that the fair value of an asset be based upon the price that would be received to sell the asset, which is an exit price.
When valuing certain financial instruments, a company that has elected the fair value measurement option must apply the accounting measurement based on which of the following criteria?
- A portion of an asset or liability
- Instrument-by-instrument basis
- Type-by-type basis
- At the entity level
Instrument-by-instrument basis
**When an entity elects to apply the fair value option to a financial instrument, the application can be on an instrument-by-instrument basis.
Which one of the following can be measured at fair value at the option of the reporting entity?
A liability under a lease contract
A debt investment classified as held-for-trading with readily determinable fair value
A debt investment classified as held-to-maturity
A liability under a pension plan
A debt investment classified as held-to-maturity
**An entity may elect to measure and report a debt investment classified as held-to-maturity at fair value. Traditionally, debt investments classified as held-to-maturity would be measured and reported at amortized cost, but the provisions of the fair value option permit such investments to be measured and reported at fair value at the option of the reporting entity
Marco has an investment that is traded in two different markets, Front market and Side market. Marco has equal access to each market. In order to determine the fair value of its investment, Marco has obtained the following per share information for the securities as of the close of business December 31, the end of its fiscal year:
Front Market Side Market
Selling Price $52/sh $50/sh
Transaction Cost $ 6/sh $ 1/sh
If Front market is the principal market for the security for Marco, using the market approach, which one of the following would be the per share amount used for measuring the investment at fair value?
$52/sh
$50/sh
$49/sh
$46/sh
$52/sh
**Since Front market is the principal market, fair value would be based on the price at which Marco could sell the investment in that market, or $52/sh. The market selling price would not be adjusted for the related direct transaction cost.
Which of the following statements concerning inputs used in ascertaining fair value is/are correct?
I. Only observable inputs can be used.
II. Inputs that incorporate the entity’s assumptions may be used.
II only.
**An entity’s assumptions may be used as inputs in determining fair value. Those assumptions would be level 3, unobservable inputs, but would be used when adequate observable inputs were not available to make fair value determinations.
Which of the following statements, if any, concerning disclosures about fair value measurements in periods subsequent to initial recognition is/are correct?
I. The fair value hierarchy level within which fair value measurements fall must be disclosed.
II. Quantitative fair value measurement disclosures must be in tabular format.
Both I and II are correct.
**Fair value measurement disclosures require both that fair value amounts be disclosed separately for each level of the fair value hierarchy and that quantitative disclosures be provided in tabular format.
Under U.S. GAAP, the disclosure requirements when fair value measurement is used are differentiated by which of -the following classifications?
- Between assets measured at fair value and liabilities measured at fair value
- Between fair value measurements that result in gains and fair value measurements that result in losses
- Between items measured at fair value on a recurring basis and items measured at fair value on a nonrecurring basis
- Between items for which fair value measurement is required and items for which fair value measurement is elected
Between items measured at fair value on a recurring basis and items measured at fair value on a nonrecurring basis
**Disclosure requirements when fair value measurement is used are differentiated between items measured at fair value on a recurring basis and items measured at fair value on a nonrecurring basis. Items measured at fair value on a recurring basis are adjusted to (measured at) fair value period after period; an example would be investments held-for-trading. Items measured at fair value on a non-recurring basis are adjusted to (measured at) fair value only when certain conditions are met; an example would be the impairment of an asset.
According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants, is Revenue. Income. Profits. Gains.
Income.
** because the IASB Framework has five elements: asset, liability, equity, income, and expense. The definition given is that of income. Note that income includes both revenues and gains.
