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Chapter 12: Q25. (page 610)
What is the GAAP definition of fair value?
The GAAP definition of fair value is “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.”
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Presented below is selected information related to Martin Burke Inc. at year-end. All these accounts have debit balances.
Cable television franchises | Film contract rights |
Music copyrights | Customer lists |
Research and development costs | Prepaid expenses |
Goodwill | Covenants not to compete |
Cash | Brand names |
Discount on notes payable | Notes receivable |
Accounts receivable | Investments in affiliated companies |
Property, plant, and equipment | Organization costs |
Internet domain name | Land |
Instructions:
Identify which items should be classified as an intangible asset. For those items not classified as an intangible asset, indicate where they would be reported in the financial statements.
Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock for \(13,200 (Fairbanks does not have significant influence). During the year, Sherman paid a cash dividend of \)3.25 per share. At year-end, Sherman stock was selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustmentaccount.)
Gershwin Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of $120,000 on April 1, 2017. The franchise grants Gershwin the right to sell certain products and services for a period of 8 years. Prepare Gershwin’s April 1 journal entry and December 31 adjusting entry.
Use the information from BE17-1 but assume the bonds are purchased as an available-for-sale security. Prepare Garfield’s journal entries for (a) the purchase of the investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of $75,500.
Stave Company invests \(10,000,000 in 5% fixed rate corporate bonds on January 1, 2017. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now \)10,600,000. Interest is paid on January 1. Prepare journal entries for Stave Company to (a) record the transactions related to these bonds in 2017, assuming Stave does not elect the fair option; and (b) record the transactions related to these bonds in 2017, assuming that Stave Company elects the fair value option to account for these bond.
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