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Chapter 7: Question 17Q (page 362)

What is the fair value option? Where do companies that elect the fair value option report unrealized holding gains and losses?

Short Answer

Expert verified

Under the fair value option, the financial instruments are measured at their fair value, andthe unrealized gains and losses are adjusted in the net income of the business entity.

Step by step solution

01

Definition of Unrealized Gains

The gain generated due to an increase in the fair value of the asset still owned by the business entity is known as unrealized gain.

02

Fair Value of Option

The option that allows the company to value the financial instrument on its fair value is known as the fair value of the option. It is stated that the instrument's fair value provides more detailed information than historical cost.

A company adopted for the fair value of the option will report the unrealized gain and loss as a part of net income.

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Most popular questions from this chapter

Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow’s Accounts Receivable account was \(555,000 and Allowance for Doubtful Accounts had a credit balance of \)40,000. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below.

Days Account Outstanding

Amount

Probability of Collection

Less than 16 days

$300,000

.98

Between 16 and 30 days

100,000

.90

Between 31 and 45 days

80,000

.85

Between 46 and 60 days

40,000

.80

Between 61 and 75 days

20,000

.55

Over 75 days

15,000

.00

Instructions

(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

(b) Show how accounts receivable would be presented on the balance sheet.

(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

What are some steps taken by both the FASB and IASB to move to fair value measurement for financial instruments? In what ways have some of the approaches differed?

Use the information presented in BE7-12 for Arness Woodcrafters but assume that the recourse liability has a fair value of \(4,000, instead of \)8,000. Prepare the journal entry and discuss the effects of this change in the value of the recourse liability on Arness’s financial statements.

(Expected Cash Flows) On December 31, 2017, Iva Majoli Company borrowed \(62,092 from Paris Bank, signing a 5-year, \)100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2019, Majoli began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Instructions

(a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2017.

(b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2019, by Paris Bank.

Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting’s measurement function.
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