CPA Financial Accounting and Reporting (FAR) : Fair Value Method
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Example Questions
Example Question #1 : Fair Value Method
Which of the following is correct regarding the fair value method?
The investment account is adjusted for investee earnings
The investment account is adjusted to fair value at the balance sheet date
The investment account will always be reported at historical cost
The investment account is reduce for impairment at the balance sheet date
The investment account is adjusted to fair value at the balance sheet date
When using the fair value method, an investment is originally accounted for at cost, then adjusted to fair value each year and the balance sheet date.
Example Question #1 : Fair Value Method
Blue Corp purchased marketable securities in Purple Corp during Year 1. At the end of Year 1, the fair value of Purple Corp had dropped below cost. Blue Corp considered the decline in value to be temporary and the security is classified as available-for-sale. What should be the effect on Blue's financial statements in Year 1?
Decrease in available-for-sale securities and decrease in other comprehensive income
No effect on available-for-sale securities and decrease in net income
Decrease in available-for-sale securities and no effect on net income
Decrease in available-for-sale securities and decrease in net income
Decrease in available-for-sale securities and decrease in other comprehensive income
Unrealized holding gains/losses on securities classified as available-for-sale are recognized as part of other comprehensive income. Therefore, in this scenario, the investment account is decreased and a loss is recognized in OCI.
Example Question #2 : Fair Value Method
A marketable debt security is moved from available-for-sale to held-to-maturity securities. At the transfer date, the security’s market value has fallen below its cost. What amount is used at the transfer date to record the security in the held-to-maturity portfolio?
Cost, if the decline in market value below cost is temporary
Market value, only if the decline in market value below cost is considered permanent
Market value, regardless of whether the decline in market value below cost is considered permanent or temporary
Cost, regardless of whether the decline in market value below cost is considered permanent or temporary
Market value, regardless of whether the decline in market value below cost is considered permanent or temporary
The security will be recorded at market value regardless of whether the decline in value is permanent or temporary.
Example Question #2 : Fair Value Method
ABC Company acquired 40% of the outstanding non voting preferred stock of DEF Co. Which method of recording an investment should ABC use?
Equity method if no other investor has more than a 40% interest
Equity method if it can acquire an additional 11% by year end
The equity method because of ABC's significant influence can be assumed
Fair value method
Fair value method
Significant influence cannot be exercised by holding non voting stock. Fair value must be used.
Example Question #4 : Fair Value Method
ABC Company received a cash dividend from a common stock investment. Should ABC report an increase in the investment account if it uses the fair value method or the equity method of accounting?
Both
Equity method
Fair value method
Neither
Neither
Under fair value, receipt of a dividend does not affect the investment account whereas under equity method it is a decrease in the investment account.
Example Question #1 : Fair Value Method
When a dividend is paid from a majority owned subsidiary to its parent company, what effect is demonstrated?
Effect on retained earnings
None of the answer choices are correct
No effect on NCI
No effect on retained earnings
No effect on retained earnings
In this circumstance, the dividend is treated as a return of capital from one company to its parent. Retained earnings remains stagnant and the NCI is decreased as it has its capital returned to it.
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