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Flashcards in FAR 4 Deck (21):
1

Which one of the following can be measured at fair value at the option of the reporting entity?
Wrong:... why?.
D. A liability under a pension plan.

An entity may not elect to measure and report financial assets and liabilities recognized under a pension plan (or other postretirement and post-employment plans) at fair value. Such assets and liabilities are specifically excluded from financial instruments that may be measured at fair value at the option of an entity, and would be measured and reported under other exiting accounting requirements.

2

Which one of the following can be measured at fair value at the option of the reporting entity?
Wrong:... why?.
B. An investment classified as held-for-trading.

An entity may not elect to measure and report an investment classified as held-for-trading at fair value because such investment must be measured at fair value. The requirement that certain financial assets and liabilities be measured and reported at fair value as provided by other existing GAAP requirements is not changed by the provisions of the fair value option.

3

Which one of the following can be measured at fair value at the option of the reporting entity?
Wrong:... why?.
A. A liability under a lease contract.

An entity may not elect to measure and report financial assets and liabilities recognized under leases at fair value. Such assets and liabilities are specifically excluded from financial instruments that may be measured at fair value at the option of an entity, and would be measured under other existing accounting requirements.

4

Which one of the following can be measured at fair value at the option of the reporting entity?
A. A liability under a lease contract.
B. An investment classified as held-for-trading.
C. An investment classified as held-to-maturity.
D. A liability under a pension plan.

An entity may elect to measure and report an investment classified as held-to-maturity at fair value. Traditionally, 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.

5

Which one of the following financial items may not be measured and reported at fair value at the election of an entity?

A. Accounts receivable.
B. Investment in debt securities to be held to maturity.
C. Investment in a subsidiary that is to be consolidated.
D. Accounts payable.

C. Investment in a subsidiary that is to be consolidated.

A firm may not use fair value to measure and report an investment in a subsidiary that is to be consolidated. The financial asset "Investment in subsidiary" will be eliminated in the consolidating process and be replaced by the subsidiary's assets and liabilities (and possibly goodwill) on the consolidated balance sheet.

6

Which of the following statements concerning the determination of fair value at the date an asset is acquired or a liability is assumed is/are correct?

I. The exit price is conceptually different than the entry price.

II. The entry price and the exit price may be different amounts at the date an asset or liability is initially recognized.

Both Statement I and Statement II are correct. An exit price and an entry price are conceptually different (Statement I) and in practice an entry price and an exit price may be different amounts at the date an asset or liability is initially recognized (Statement II). Such a difference may come about, for example, because the entry price is based on a transaction between related parties or because the selling entity was under financial duress at the time of the sale.

7

On January 15, 2008, Able Co. made a significant investment in the debt securities of Baker Co., which it intends to hold until the debt matures. Able's fiscal year-end is December 31. If Able Co. intends to measure and report its investment in Baker Co. debt securities at fair value as permitted by FASB #159, "The Fair Value Option... ", on which one of the following dates must Able elect to implement the fair value option?

A. January 15, 2008
B. January 31, 2008
C. March 31, 2008
D. December 31, 2008

A. January 15, 2008


If Able Co. intends to elect to implement the fair value option for its investment in Baker's debt, it must make its election on the date it first recognizes the investment, which is January 15, 2008.

8

In determining the fair value of an asset or liability, would the fair value of the asset or the fair value of the liability be determined using an entry price or an exit price?

Asset Fair Value Liability Fair Value
Entry price Entry price
Entry price Exit price
Exit price Entry price
Exit price Exit price

Exit price Exit price


The appropriate basis for determining the fair value of an asset or a liability is an exit price.

9

When the fair value of an asset is determined as the amount that currently would be required to replace the service capacity of the asset, which one of the following valuation techniques has been used?

A. Income approach.
B. Cost approach.
C. Expense approach.
D. Market approach.

B. Cost approach.

When fair value is determined as the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost), the cost approach has been used.

10

In the determination of fair value for GAAP purposes, which one of the following is not a valuation technique or approach specified in ASC 820, "Fair Value Measurement"?

A. Income approach.
B. Cost approach.
C. Expense approach.
D. Market approach.

The expense approach is not one of the approaches for the determination of fair value specified in ASC 820; it is an irrelevant distracter in this question.

11

In which one of the following circumstances is the entry price to acquire an asset least likely to represent fair value of the asset?

A. An investment security is acquired for cash through a public market.
B. A machine is acquired from a wholesaler by giving an interest-bearing note.
C. A significant amount of raw material inventory is acquired for cash from a bankrupt supplier.
D. Land and a building are acquired in the open market by giving a mortgage to a lender.

C. A significant amount of raw material inventory is acquired for cash from a bankrupt supplier.

Since the raw material inventory was acquired from a supplier in bankruptcy, it is likely that the transaction occurred when the seller was under duress. Therefore, it is likely that the price paid (an entry price) does not represent fair value - an exit price at which the inventory could be sold by a seller not under financial duress.

12

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?

A. $52/sh
B. $50/sh
C. $49/sh
D. $46/sh

A. $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.

13

If a firm changes the valuation approach used to determine fair value, how would the amount of change in fair value resulting from the change in the valuation approach be reported?

A. As a change in accounting principle.
B. As an adjustment to beginning retained earnings of the period of change in approach.
C. As a change in accounting estimate.
D. As gain on the income statement for the period of change in approach.

C. As a change in accounting estimate.

The amount of change in fair value resulting from a change in the valuation approach used to determine fair value is reported as a change in accounting estimate. That means that the amount of the change, like the change in fair value resulting from market forces, will be reported in current income (as income from continuing operations).

14

Which of the following valuation methods may be used to measure investments classified as held-to-maturity?

Amortized Cost Fair Value
No No
No Yes
Yes No
Yes Yes

Yes Yes

Both amortized cost and fair value may be used to measure and report investments classified as held-to-maturity. Amortized cost is the traditional measurement method for investments held-to-maturity and would be used unless an entity elects to use fair value, which is permitted by the fair value option.

15

Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny's carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should the land and building be reported on Papa's consolidated statements prepared immediately after the transaction?

Land Building
$75,000 $35,000
$55,000 $55,000
$60,000 $50,000
$50,000 $60,000

$60,000 $50,000


Even though there was no profit or loss on the intercompany transaction, it resulted in amounts being redistributed between the depreciable asset office building and the non-amortizable asset land, which would result in different amounts of depreciation expense than if the transaction had not occurred. Therefore, the intercompany transaction must be "eliminated" so that the consolidated statements would show land at $60,000 and buildings at $50,000. (Sonny also would need to assess the building for possible impairment.)

16

In which of the following circumstances, if any, would an auditor likely be especially concerned as to whether or not the price paid to acquire an asset was the fair value of the asset?

I. The asset was acquired from the acquiring firm's majority shareholder.

II. The asset was acquired in an active exchange market.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

A. I only.

If an asset was acquired from the acquiring firm's majority shareholder, an auditor likely would be especially concerned as to whether or not the price paid to acquire the asset was fair value of the asset because an entity and its majority shareholder are related parties. Related party transactions may not be at arms-length and, therefore, may require special attention of an auditor and special disclosures related thereto.

17

Which one of the following can be measured at fair value at the option of the reporting entity?
A. A liability under a lease contract.
B. An investment classified as held-for-trading.
C. An investment classified as held-to-maturity.
D. A liability under a pension plan.

C. An investment classified as held-to-maturity.

An entity may elect to measure and report an investment classified as held-to-maturity at fair value. Traditionally, 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.

D. A liability under a pension plan.

Incorrect...

An entity may not elect to measure and report financial assets and liabilities recognized under a pension plan (or other postretirement and post-employment plans) at fair value. Such assets and liabilities are specifically excluded from financial instruments that may be measured at fair value at the option of an entity, and would be measured and reported under other exiting accounting requirements.

B. An investment classified as held-for-trading.
Incorrect...

An entity may not elect to measure and report an investment classified as held-for-trading at fair value because such investment must be measured at fair value. The requirement that certain financial assets and liabilities be measured and reported at fair value as provided by other existing GAAP requirements is not changed by the provisions of the fair value option

A. A liability under a lease contract.

An entity may not elect to measure and report financial assets and liabilities recognized under leases at fair value. Such assets and liabilities are specifically excluded from financial instruments that may be measured at fair value at the option of an entity, and would be measured under other existing accounting requirements.

18

Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny's carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should the land and building be reported on Papa's consolidated statements prepared immediately after the transaction?

Land Building
$75,000 $35,000
$55,000 $55,000
$60,000 $50,000
$50,000 $60,000

$60,000 $50,000


Even though there was no profit or loss on the intercompany transaction, it resulted in amounts being redistributed between the depreciable asset office building and the non-amortizable asset land, which would result in different amounts of depreciation expense than if the transaction had not occurred. Therefore, the intercompany transaction must be "eliminated" so that the consolidated statements would show land at $60,000 and buildings at $50,000. (Sonny also would need to assess the building for possible impairment.)

19

Even though the SEC delegates the creation of accounting standards to the private sector, the SEC frequently comments on accounting and auditing issues. The main pronouncements published by the SEC are:
A. Federal Reporting Updates (FRU).
B. Financial Reporting Releases (FRR).
C. Staff Auditing Bulletins (SAB).
D. Accounting Principles Opinions (APO).

B. Financial Reporting Releases (FRR).

The main pronouncements published by the SEC are the Financial Reporting Releases (FRR) and the Staff Accounting Bulletins (SAB).

20

The SEC defines a foreign private issuer as any issuer other than a foreign government, except an issuer that where more than 50% of the outstanding voting securities are directly or indirectly owned by residents of the U.S. and what other condition?
A. The business of the issuer is administered principally in the foreign country.
B. More than 50% of the assets of the issuer are located in the foreign country.
C. The majority of its executive officers or directors are U.S. citizens or residents.
D. All of the above.

C. The majority of its executive officers or directors are U.S. citizens or residents.

A foreign private issuer is any foreign issuer other than a foreign government, except an issuer that meets the following conditions:
A. More than 50% of the outstanding voting securities are directly or indirectly owned by residents of the U.S., and

B. Any of the following:
The business of the issuer is administered principally in the U.S.
More than 50% of the assets of the issuer are located in the U.S.
The majority of its executive officers or directors are U.S. citizens or residents.
Rule 205, Securities Act 1933

21

The SEC enforces the corporate registration requirements of the Securities Act of 1933 as one of its principal objectives. These requirements are intended to provide information that enables the SEC to:
A. Evaluate the financial merits of the corporation offering the securities to the public.
B. Ensure that investors are provided with adequate information on which to base investment decisions.
C. Guarantee that the facts contained in the registration statement are accurate.
D. Assure investors of the accuracy of the financial statements.

B. Ensure that investors are provided with adequate information on which to base investment decisions.


The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. In order to carry out the mandates in the Securities Act of 1933, the SEC is ensuring that investors are provided with adequate information on which to base investment decisions. www.SEC.gov, What We Do.