Section 3K FV Measurement

Question 1

During Year 1, Wistrand Corporation purchased 12,000 shares of the 800,000 outstanding shares of Cherry Corporation’s common stock for $89,000. At the end of Year 1, Wistrand received $3,280 of dividends from its investment in Cherry’s stock. The fair value of Wistrand’s investment on December 31, Year 1, is $93,730. What amount of income or loss that is attributable to the Cherry stock investment should be reflected in Wistrand’s earnings for Year 1?

$3,730

$8,010

$5,000

$3,280

Answer 1

$8,010

Equity securities representing less than 20% of the investee’s outstanding common stock are marked to fair value at each reporting period, with gains and losses reported in earnings. Dividends are treated as dividend income. Therefore, there is both an increase from the dividend and from the increase in fair value that must be recognized:

Dividend $3,280
Increase in FV ($93,730 − $89,000) 4,730
Increase in income $8,010

Question 2

An entity may choose to elect the fair value option on an instrument-by-instrument basis for an eligible item only on the date that one of the following occurs:

1. The entity first ___the eligible item.
2. The entity enters into an eligible firm __.
3. Financial assets that have been reported at fair value with __ and _–
4. The accounting treatment for an investment in another entity __because the investment becomes subject to the equity method of accounting.
5. An event occurs that requires an eligible item to be measured at fair value at the time of the event but does not require ___measurement at each reporting date after that

Answer 2

recognizes

commitment

unrealized gains and losses

changes

fair value

Question 3

The following are financial assets and financial liabilities that are not eligible for the fair value option:

1. Employers’ and plans’ obligations (OPEB & STOCK)
   
   1. b. Substantively extinguished__
2. ___contracts, other than financial guarantees
3. ___contracts
4. ____purchase obligations
5. ___accounted for under the equity method
6. ___interests and equity investments in consolidated subsidiaries
7. ___instruments issued by the entity and classified in stockholders’ equity
8. Trade receivables and payables due in___

Answer 3

yeah

debt

Insurance

Lease

Unconditional

Investments

Noncontrolling

Equity

one year or less

Question 4

Answer 4

$1.20

The gain is the difference between the current replacement cost ($10) and price-level adjustment historical cost of $8.80 ($8 × ($121 ÷ $110)).

Holding gain = $10 − $8.80 = $1.20

Question 5

The price used to measure fair value should be adjusted for which transaction costs?

The costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market

All transaction costs

The incremental direct costs to sell the asset or transfer the liability

No transaction costs

Answer 5

The costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market

1. The price used to measure fair value should not be adjusted for transaction costs, which are the incremental direct costs to sell the asset or transfer the liability
2. Note, however, that transaction costs do not include the costs that would be incurred to transport the asset or liability to or from its principal (or most advantageous) market.
3. If location is an attribute of the asset or liability, the FASB takes the position in FASB ASC 820-10-35-8 that “the price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall be adjusted for the costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market.”

Question 6

Issue of Transaction Costs

The price used to measure fair value should not be adjusted for ___costs, which are the incremental direct costs to sell the asset or transfer the liability; transaction costs do not include the costs that would be incurred to ___the asset or liability to or from its principal (or most advantageous) market.

If ___is an attribute of the asset or liability, the price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall be adjusted for the costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market.

Answer 6

transaction

transport

location

Question 7

When computing purchasing power gain or loss on net monetary items, which of the following accounts is classified as nonmonetary?

Advances to unconsolidated subsidiaries

Allowance for uncollectible accounts

Unamortized premium on bonds payable

Accumulated depreciation of equipment

Answer 7

Accumulated depreciation of equipment

Monetary assets are cash or items whose amounts are fixed in terms of numbers of dollars. All of the assets are monetary assets except for accumulated depreciation.

Question 8

The following definitions are important in understanding price-level accounting:

a. ___items: Those assets and liabilities whose amounts are fixed by contract or otherwise in terms of numbers of dollars, regardless of changes in specific prices or in the general level of prices
b. ___items: Items reported in the financial statements other than monetary assets and liabilities
c. __gains or losses: Occur when claims to a fixed amount of money are held during periods in which price levels change. For example, cash held through a period of inflation results in a decline in purchasing power and thus a purchasing power loss.

Answer 8

Monetary

Nonmonetary

Purchasing power

Question 9

During Year 3, Gilman Co. purchased 5,000 shares of the 500,000 outstanding shares of Meteor Corp.’s common stock for $35,000. During Year 3, Gilman received $1,800 of dividends from its investment in Meteor’s stock. The fair value of Gilman’s investment on December 31, Year 3, is $32,000. Gilman has elected the fair value option for this investment. What amount of income or loss that is attributable to the Meteor stock investment should be reflected in Gilman’s earnings for Year 3?

Income of $4,800

Loss of $3,000

Income of $1,800

Loss of $1,200

Answer 9

Loss of $1,200

There is both a gain and a loss that must be recognized:

Dividend $ 1,800
Decline in value ($35,000 - $32,000) (3,000)
Net loss $(1,200)

Question 10

Entities must report assets and liabilities that are measured at fair value pursuant to the fair value option __from those reported at fair value using another measurement attribute. The entity can either:

a. present the ___of fair value and non-fair-value amounts in the same line item in the statement of financial position and parenthetically disclose the amount measured at fair value included in the aggregate amount, or
b. present two ____to display the fair value and non-fair-value carrying amounts.

Answer 10

separately

aggregate

Separate line items

Question 11

Which of the following phrases best describes a Level 1 input for measuring the fair value of an asset or liability?

Inputs that are principally derived from or corroborated by observable market data

Unadjusted quoted prices for identical assets or liabilities in active markets

Inputs for the asset or liability based on the reporting entity’s internal data

Quoted prices for similar assets or liabilities in active markets

Answer 11

Unadjusted quoted prices for identical assets or liabilities in active markets

The FASB’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:

1. Level 1 inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date
2. Level 2 inputs—inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly
3. Level 3 inputs—unobservable inputs for the asset or liability

Question 12

The FASB’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:

1. Level 1 inputs—___(unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date
2. Level 2 inputs—inputs other than ___included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly
3. Level 3 inputs—___inputs for the asset or liability

Answer 12

quoted prices

quoted prices

unobservable

Question 13

Inputs to Valuation Techniques

Inputs may be observable or unobservable.

____inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.

___inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available.

The valuation techniques an entity uses should maximize the use of ___inputs and minimize the use of ___inputs.

Answer 13

Observable

Unobservable

observable , Unobservable

Question 14

Which of the following phrases best describes a Level 2 input for measuring the fair value of an asset or liability?

None of the answer choices are correct.

Quoted prices for similar assets or liabilities in active markets

Unobservable inputs for the asset or liability

Unadjusted quoted prices for identical assets or liabilities in active markets

Answer 14

Quoted prices for similar assets or liabilities in active markets

The FASB’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:

1. Level 1 inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date
2. Level 2 inputs—inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly
3. Level 3 inputs—unobservable inputs for the asset or liability

Question 15

On January 1, Year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.’s outstanding voting stock. For Year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year-end, the fair value of Peabody’s investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for Year 1 attributable to the investment?

$10,000

$18,000

$6,000

$16,000

Answer 15

$16,000

Question 16

Unconsolidated subsidiaries should be accounted for by the parent at ___or under the equity method, whichever is appropriate.

Ability to Exercise Significant Influence

Other investments in voting stock of the investee should be accounted for by the equity method if the investor has the ability to exercise ___over the operating and financial policies of the investee.

If the investor does not have the ability to exercise significant influence, the ___method should be used.

Answer 16

fair value

Significant influence

fair value

Question 17

As a general rule, ownership of less than __% (direct or indirect) of the voting stock of the investee leads to the presumption that an investor does not have the ability to exercise significant influence.

Answer 17

20%

Question 18

Which of the following is an eligible item for the fair value measurement option under FASB ASC 825-10-15-4?

1. Employers’ and plans’ obligations (or assets representing net overfunded positions) for pension benefits or other postretirement benefits
2. None of the answer choices are eligible items.
3. An investment in a subsidiary that the entity is required to consolidate
4. The rights and obligations under an insurance contract that is not a financial instrument (because it requires or permits the insurer to provide goods or services rather than a cash settlement) but whose terms permit the insurer to settle by paying a third party to provide those goods or services

Answer 18

The rights and obligations under an insurance contract that is not a financial instrument (because it requires or permits the insurer to provide goods or services rather than a cash settlement) but whose terms permit the insurer to settle by paying a third party to provide those goods or services

Question 19

A company performing its long-lived asset impairment testing is reviewing the fair value of equipment. Each of the following valuation techniques may be appropriate for measuring the fair value of the equipment, except the:

cost approach.

income approach.

net realizable value approach.

market approach.

Answer 19

net realizable value approach.

The net realizable value approach is not an acceptable fair valuation method. The determination of fair value may require the use of one or more valuation techniques. The valuation technique used should be consistent with the market approach, income approach, and/or cost approach, as appropriate.

Question 20

The determination of fair value may require the use of one or more valuation techniques. The valuation technique used should be consistent with the market approach, income approach, and/or cost approach, as appropriate. The key aspects of those definitions are as follows:

a. ____uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business).
b. ____uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted).
c. ____is based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost).

Answer 20

Market approach. The market approach

Income approach. The income approach

Cost approach. The cost approach

Question 21

1. A company owns land and a building that houses its manufacturing operations. When the company purchased the manufacturing facility 10 years ago, the purchase price allocated to the land account was $120,000. The manufacturing facility is located in an area that was once the site of many factories.
2. The owners of many of the neighboring factories have recently sold their facilities to residential real estate developers. The company’s land is also suitable for residential development.
3. The estimated current value of the land as part of the manufacturing facility is $150,000.
4. The estimated current value of the land as an undeveloped investment is $130,000, and the current value of the land as part of a residential development would be $180,000.

What is the fair value of the land?

$150,000

$130,000

$180,000

$120,000

Answer 21

180,000

FASB ASC 820 defines fair value 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.” Fair value measurement assumes that the transaction occurs in the principal market for the asset or liability.

If there is no principal market for that type of asset or liability, the entity should use the most advantageous market for that asset or liability; therefore, the fair value of the land should be determined using the residential market, which is $180,000.

Question 22

Fair Value Defined

FASB ASC 820-10-20 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market ___at the ____date.”

Principal or Most Advantageous Market

Fair value measurement should assume that the transaction to sell the asset or transfer the liability occurs in the ___market for the asset or liability. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest __and level of activity for the asset or liability.

Answer 22

participants , measurement

principal , volume

Question 23

Which of the following is not an eligible item for the fair value measurement option under FASB ASC 825-10-15-4?

1. An interest in a variable interest entity that the entity is required to consolidate
2. A recognized financial asset and financial liability, except any listed below in exceptions
3. A firm commitment that would otherwise not be recognized at commencement and that involves only financial instruments (An example is a forward purchase contract for a loan that is not readily convertible to cash. That commitment involves only financial instruments—a loan and cash—and would not otherwise be recognized because it is not a derivative instrument.)
4. A written loan commitment

Answer 23

An interest in a variable interest entity that the entity is required to consolidate

Question 24

Giaconda, Inc., acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?

Market

Income

Observable inputs

Cost

Answer 24

Income

The valuation techniques discussed in FASB ASC 820-10-35-24A include the:

1. market approach,
2. income approach, and
3. cost approach.

The income approach uses valuation techniques to determine a discounted present value. This is the approach described in this problem.

Question 25

Which of the following is a Level 3 input to valuation techniques used to measure the fair value of an asset?

Quoted prices in active markets for identical assets

Quoted prices for similar assets in active markets

Inputs other than quoted prices that are observable for the asset

Unobservable inputs for the asset

Answer 25

Unobservable inputs for the asset

A fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into three broad levels, as follows: (1) Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; (2) Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and (3) Level 3 inputs are unobservable inputs for the asset or liability.

Question 26

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?

Instrument-by-instrument basis

A portion of an asset or liability

Type-by-type basis

At the entity level

Answer 26

Instrument-by-instrument basis

Question 27

An entity may choose to elect the fair value option on an instrument-by-instrument basis for an eligible item only on the date that one of the following occurs:

1. The entity first recognizes the eligible item.
2. The entity enters into an eligible firm commitment.
3. Financial assets that have been reported at fair value with unrealized gains and losses included in earnings because of specialized accounting principles cease to qualify for that specialized accounting.
4. The accounting treatment for an investment in another entity changes because the investment becomes subject to the equity method of accounting.
5. An event occurs that requires an eligible item to be measured at fair value at the time of the event but does not require fair value measurement at each reporting date after that, excluding the recognition of impairment under lower-of-cost-or-market accounting or other-than-temporary impairment of equity securities.

Answer 27

a

Question 28

Any fair value measurement should assume that the transaction to sell the asset or transfer the liability occurs in which market?

None of the answer choices are correct.

The principal market and most advantageous market are the same.

The most advantageous market for that asset or liability

The principal market for the asset or liability

Answer 28

The principal market for the asset or liability

Any fair value measurement should assume that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The principal market is defined in FASB ASC 820-10-20 as “the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability.”

If there is no principal market for that type of asset or liability, the entity should use the most advantageous market for that asset or liability.

Question 29

Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?

Quoted market prices on a stock exchange for an identical asset

Historical performance and return on Driver’s investment in Favre

Quoted market prices available from a business broker for a similar asset

Discounted cash flow of Favre’s operations

Answer 29

Quoted market prices on a stock exchange for an identical asset

FASB ASC 820-10-20 defines fair value 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.” The fair value measurement should be specific to a particular asset. The best measure of an investment in another company would be the price of a similar business.

Question 30

1. Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset.
2. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, the sales proceeds are $80, which is net of transaction costs of $1.

What amount should Crossroads report as the fair value of the asset?

$76

$81

$80

$82

Answer 30

$81

In determining the most advantageous market, adjust for transaction costs. But to compute the actual fair value amount, ignore the transaction costs. The first market yields $76 and the second market yields $80, so the second market is the most advantageous. The fair value in the second market is $81 ($80 with the $1 added back).

Question 31

Which of the following is a true statement regarding FASB ASC 825-10-25-1?

None of the answer choices are true statements regarding FASB ASC 825-10-25-1.

The fair value option established by FASB ASC 825-10 requires all entities to measure eligible items at fair value at specified dates.

A business entity shall report unrealized gains and losses on items for which the fair value option has been elected as an adjustment to retained earnings.

The statement permits election of fair value measurement on a contract-by-contract basis.

Answer 31

The statement permits election of fair value measurement on a contract-by-contract basis.

FASB ASC 825-10-25-1 permits the fair value election but does not require it. Unrealized gains and losses on these items are reported in earnings, not directly to retained earnings: “This Subtopic permits all entities to choose, at specified election dates, to measure eligible items at fair value (the ‘fair value option’).”

Question 32

Answer 32

$35,000

FASB ASC 820 defines fair value 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.” Fair value measurement assumes that the transaction occurs in the principal market for the asset or liability.

If there is no principal market for that type of asset or liability, the entity should use the most advantageous market for that asset or liability; therefore, the fair value of the financial asset is $35,000.

Question 33

A company that wishes to disclose information about the effect of changing prices should report this information in:

management’s report to shareholders.

the notes to the financial statements.

the body of the financial statements.

supplementary information to the financial statements.

Answer 33

supplementary information to the financial statements.

FASB ASC 255-10-50-1 provides that “a business entity that prepares its financial statements in U.S. dollars and in accordance with U.S. generally accepted accounting principles is encouraged, but not required, to disclose supplementary information on the effects of changing prices.”

This information would be supplementary information to the financial statements.

Question 34

Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability’s fair value, except:

quoted prices for similar assets and liabilities in markets that are active.

interest rates that are observable at commonly quoted intervals.

internally generated cash flow projections for a related asset or liability.

quoted prices for identical assets and liabilities in markets that are not active.

Answer 34

internally generated cash flow projections for a related asset or liability.

Question 35

Answer 35

$23,950

Considering the transaction prices:

Market 1 would result in $24,000 - $225 = $23,775.

Market 2 would result in $23,950 - $140 = $23,810.

Therefore, Market 2 would be the most advantageous market. Once the most advantageous market is identified, the quoted price of the asset is used, ignoring the transaction costs; therefore, the asset would be valued at $23,950.

Question 36

A company has an equity investment with a historical cost of $500,000 that is traded in an active market. At December 31, year 1, the quoted price for an identical investment was $400,000 and the quoted price for a similar investment was $430,000. Using the company’s internal present value of cash flows model, the company arrived at a value of $410,000. What amount is the value of the investment on December 31, year 1?

$430,000

$410,000

$500,000

$400,000

Answer 36

$400,000

A fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into levels. A Level 1 input consists of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date, and a Level 2 input is an input other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 1 valuations are of higher order and represent the most appropriate measurement if a Level 1 price is available. Level 2 prices are used if a Level 1 input is not available.

The equity investment should be valued at the Level 1 value of $400,000.

Question 37

Which of the following statements is correct regarding fair value measurement?

Fair value measurement does not consider risk.

Fair value measurement does not consider restrictions.

Fair value is a market-based measurement.

Fair value is an entity-specific measurement.

Answer 37

Fair value is a market-based measurement.

FASB ASC 820-10-20 defines fair value 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.” Fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability; it is a market-based measurement.

Question 38

A company leases trucks and properly classifies the leases as finance leases. The leases have a 10-year term, and the lease calculations were done 3 years ago when interest rates were lower. Which of the following is the appropriate accounting treatment, if any, for the application of the fair value option to lease transactions?

Recognize the change to fair value accounting with an unrealized loss in accumulated other comprehensive income.

Leases are not eligible for the fair value option.

Recognize the change to fair value accounting with an unrealized loss in the income statement.

Recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings.

Answer 38

Leases are not eligible for the fair value option.

Companies may choose to measure a wide range of financial assets and liabilities at fair value. Even though leases are considered financial in nature, the FASB specifically excludes “financial assets and financial liabilities recognized under leases” from the fair value option of accounting (FASB ASC 825-10-15-5).

The remaining answer choices are not correct as there is no option to recognize the change in fair value.

Question 39

Financial statements prepared under which of the following methods include adjustments for both specific price changes and general price-level changes?

Historical cost/nominal dollar

Current cost/nominal dollar

Historical cost/constant dollar

Current cost/constant dollar

Answer 39

Current cost/constant dollar

FASB ASC 255-10-20 describes current cost/constant dollar accounting as “a method of accounting based on measures of current cost or lower recoverable amounts in units of currency, each of which has the same general purchasing power.”

These statements include adjustments for both specific price changes and general price-level changes.

Question 40

The fair value for an asset or liability is measured as the:

price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.

appraised value of the asset or liability.

cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale.

price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants.

Answer 40

price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.

The correct answer is the definition of fair value as it appears in the glossary of the FASB Accounting Standards Codification: “Fair Value:

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.” (FASB ASC 820-10-20)

Question 41

In a period of rising general price levels, Pollard Corp. discloses income on a current cost basis. Which of the following contributes to Pollard’s purchasing power loss on net monetary items?

Refundable deposits with suppliers

Warranty obligations

Wages payable

Equity investment in unconsolidated subsidiaries

Answer 41

Refundable deposits with suppliers

• Purchasing power gain or loss is computed by restating monetary assets and liabilities in units of constant purchasing power.
• Rising prices would cause liabilities to be paid with less valuable dollars, so equity investment in unconsolidated subsidiaries, warranty obligations, and wages payable would result in a purchasing power gain.
• Receipt of less valuable dollars from refundable deposits would result in a purchasing power loss.

Question 42

The following assets were among those that appeared on Baird Co.’s books at the end of the year:

Demand bank deposits $650,000
Net long-term receivables 400,000
Patents and trademarks 150,000

In preparing constant dollar financial statements, how much should Baird classify as monetary assets?

$650,000

$800,000

$1,050,000

$1,200,000

Answer 42

$1,050,000

Monetary assets are cash or items whose amounts are fixed in terms of numbers of dollars. Demand deposits and receivables are monetary assets; patents and trademarks are not.

Demand bank deposits $ 650,000
Net long-term receivables 400,000
Total $1,050,000

Question 43

Answer 43

$1,000

Considering the transaction prices:

1. Market A would result in $1,000 - $75 = $925
2. Market B would result in $1,050 - $150 = $900

Therefore, Market A would be the most advantageous market.

Under FASB ASC 820-10-35-9B, the price of the asset is not adjusted for transaction costs. Consequently, the asset would be valued at $1,000.