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4 CPA-05411 A change from the cost approach to the market approach of measuring fair value is considered to be what type of accounting change? A. Change in accounting estimate. B. Change in accounting principle. C. Change in valuation technique. D. Error correction.
Explanation Choice "A" is correct. A change in the valuation technique used to measure fair value is a change in accounting estimate. Choice "B" is incorrect. Per SFAS No. 157, a change in valuation technique is a change in accounting estimate, not a change in accounting principle. Choice "C" is incorrect. Although a change from the cost approach to the market approach is a change in valuation technique, a change in valuation technique is not defined as a type of accounting change, but instead falls into the category of changes in accounting estimate. Choice "D" is incorrect. Both the market approach and the cost approach are acceptable methods of measuring fair value per SFAS No. 157; therefore, switching between these methods is not the correction of an error. Additionally, an error correction is not a type of accounting change.
17 CPA-05412 Which of the following statements is correct regarding fair value measurement? A. Fair value is a market-based measurement. B. Fair value is an entity-specific measurement. C. Fair value measurement does not consider risk. D. Fair value measurement does not consider restrictions
Explanation Choice "A" is correct. 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 in the principal market at the measurement date. It is a market-based measure, not an entity-based measure. Choice "B" is incorrect. Fair value measurement is a market-based measure, not an entity-based measure. Choice "C" is incorrect. Fair value measurement should include all the assumptions that a market participant would make, including assumptions about risk. Choice "D" is incorrect. Fair value measurement should include all the assumptions that a market participant would make, including any information about restrictions.
14 CPA-04905 Farmer Joe sells corn at four exchanges, as follows: Bushels of Corn Sold at This Exchange Price Paid per Bushel of Corn Transaction Costs Exchange by Farmer Joe by All Suppliers per Bushel of Corn Illinois 4,000 1,000,000 $3.78 $0.06 Iowa 3,500 1,750,000 $3.75 $0.05 Michigan 2,800 2,000,000 $3.73 $0.02 Nebraska 3,200 1,400,000 $3.76 $0.07 For purposes of determining the fair value of Farmer Joe's corn, which exchange is the "most advantageous" market? A. Illinois. B. Iowa. C. Michigan. D. Nebraska.
Explanation Choice "A" is correct. The "most advantageous" market is the market offering the best price after subtracting transaction costs. The price offered by the Illinois exchange, after subtracting transaction costs, is $3.72/bushel, which is higher than that offered by any other exchange. Choice "B" is incorrect. The price offered by the Iowa exchange, after subtracting transaction costs, is $3.70/bushel, which is lower than that offered by the Illinois exchange. Choice "C" is incorrect. The price offered by the Michigan exchange, after subtracting transaction costs, is $3.71/bushel, which is lower than that offered by the Illinois exchange. Choice "D" is incorrect. The price offered by the Nebraska exchange, after subtracting transaction costs, is $3.69/bushe
19.CPA-08733 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? A. A portion of an asset or liability. B. Instrument-by-instrument basis. C. Type-by-type basis. D. At the entity level.
Explanation Choice "B" is correct. Fair value is measured for a specific asset/liability or a group of assets/liabilities. Fair value is a market-based measure, not an entity-based measure. A company may apply fair value to financial instruments on an instrument-by-instrument basis, but once elected, fair value measurement will be used until the asset/liability is disposed. Choice "A" is incorrect. Fair value may be applied to a whole financial instrument asset/liability, not a portion of the whole. Choice "C" is incorrect. Fair value may be applied to a whole financial instrument asset/liability, but does not have to be applied to every asset/liability within a certain group. Choice "D" is incorrect. Fair value may be applied to a specific asset/liability or a group of assets/liabilities, but it is not necessary for an entity to report all financial assets/liabilities at fair value.
9 CPA-07260 The fair value for an asset or liability is measured as: A. The appraised value of the asset or liability. B. The price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants. C. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants. D. The cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale.
Explanation Choice "C" is correct. 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 in the principal market at the measurement date under market conditions. Choice "A" is incorrect. Fair value measurements are not based on the appraised value of an asset or liability. Choice "B" is incorrect. Fair value is an exit price, not an entrance price (i.e., sell an asset, not acquire an asset). Choice "D" is incorrect. Fair value is not based on the carrying amount or book value of an asset or liability.
12 CPA-04281 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. 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? A. $76 B. $80 C. $81 D. $82
Explanation Choice "C" is correct. If the principal market (the market with the greatest volume and level of activity) cannot be identified, the most advantageous market should be used when determining the fair value of a financial asset. The most advantageous market will be the one which generates the highest net price, after considering transaction costs. However, the transaction costs will not be incorporated into the fair value. The second market generates the highest net price of $80 after considering transaction costs; therefore, it should be used for fair value purposes. The fair value amount will exclude transaction costs, which results in a fair value of $81 for the asset. Choice "A" is incorrect. The first market is not the most advantageous market since the selling price less transaction costs results in the lower of the two market values. Choice "B" is incorrect. Though the transaction costs are used to determine the most advantageous market, they are not used to determine the fair value of the asset. Choice "D" is incorrect. This answer correctly adds back the transaction costs in determining fair value, but it incorrectly uses the price provided in the first market. The first market is not the most advantageous market since the selling price less transaction costs results in the lower of the two market values.
7 CPA-06057 ABC Company owns stock in XYZ Company. The stock is traded on the New York Stock Exchange and the London Stock Exchange. Stock price information from the two stock exchanges on December 31 is as follows: Exchange Quoted Stock Price Transaction Costs Net New York $103 $1 $102 London $106 $5 $101 What is the fair value of the XYZ stock on December 31 if there is no principal market for the stock? A. $101 B. $102 C. $103 D. $106
Explanation Choice "C" is correct. If there is no principal market, then the price in the most advantageous market is the fair value of the stock. The most advantageous market is the market with the best price after considering transaction costs. Although the London quoted market price is higher, after transaction costs the net amount is lower, so New York is the most advantageous market and the fair value is $103. Choice "A" is incorrect. Transaction costs are considered when determining the most advantageous market, but are not included in the final fair value measurement. Choice "B" is incorrect. Transaction costs are considered when determining the most advantageous market, but are not included in the final fair value measurement. Choice "D" is incorrect. Although the London quoted market price is higher, after transaction costs the net amount is lower, so New York is the most advantageous market and the fair value is $103.
10 CPA-08231 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: A. Quoted prices for identical assets and liabilities in markets that are not active. B. Quoted prices for similar assets and liabilities in markets that are active. C. Internally generated cash flow projections for a related asset or liability. D. Interest rates that are observable at commonly quoted intervals
Explanation Choice "C" is correct. Internally generated cash flow projections for a related asset or liability would be better classified as a Level 3 input rather than a Level 2 input because the internally generated cash flow projection is based on "unobservable" inputs reflecting a company's "own assumptions" about the way the related asset or liability would be priced. Choice "A" is incorrect. Quoted prices for identical assets and liabilities in markets that are not active are a Level 2 observable input. Choice "B" is incorrect. Quoted prices for similar assets and liabilities in markets that are active are a Level 2 input. Choice "D" is incorrect. Interest rates that are observable at commonly quoted intervals are a Level 2 observable input.
18CPA-05634 Which of the following is a Level 3 input to valuation techniques used to measure the fair value of an asset? A. Quoted prices in active markets for identical assets. B. Quoted prices for similar assets in active markets. C. Unobservable inputs for the asset. D. Inputs other than quoted prices that are observable for the asset.
Explanation Choice "C" is correct. Level 3 inputs are unobservable inputs for the asset or liability, reflecting the entity's judgment about the assumptions that a market participant would use. Choice "A" is incorrect. A Level 1 valuation is a quoted price in an active market for the identical asset or liability. Choice "B" is incorrect. A Level 2 valuation uses inputs other than quoted market prices that are either observable or unobservable. Applying fair value based on a similar asset's value is a Level 2 valuation. Choice "D" is incorrect. A Level 2 valuation uses inputs other than quoted market prices that are either observable or unobservable. Applying fair value based on inputs other than quoted prices that are observable for the asset is a Level 2 valuation.
6 CPA-06058 The fair value of which of the following was determined using a Level 3 input? A. A building whose price per square foot is derived from prices in observed transactions involving similar buildings in similar locations. B. Common stock traded and quoted on the New York Stock Exchange. C. Shares of a privately held company whose value is based on projected cash flows. D. A privately placed bond whose value is derived from a similar bond that is publically traded.
Explanation Choice "C" is correct. Projected cash flows are an unobservable input based on entity assumptions and would be classified as a Level 3 input. Choice "A" is incorrect. Prices from observed transactions involving similar assets are Level 2 inputs. Choice "B" is incorrect. Quoted stock prices in active stock markets are Level 1 inputs. Choice "D" is incorrect. The value of a similar liability in an active market is a Level 2 input.
5 CPA-06965 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? A. Discounted cash flow of Favre's operations. B. Quoted market prices available from a business broker for a similar asset. C. Quoted market prices on a stock exchange for an identical asset. D. Historical performance and return on Driver's investment in Favre.
Explanation Choice "C" is correct. Quoted market prices on a stock exchange for an identical asset are considered to be a Level 1 input, the most reliable of all. Choice "A" is incorrect. The discounted cash flow of Favre's operations is considered to be a Level 3 input, the least reliable of all. Choice "B" is incorrect. Quoted market prices available from a business broker for a similar asset are considered to be a Level 2 input, not as reliable as those coming from a stock exchange for an identical asset. Choice "D" is incorrect. The historical performance and return on Driver's investment in Favre are considered to be Level 3 unobservable inputs, the least reliable of all.
2 CPA-05409 Which of the following statements is incorrect regarding the inputs that can be used to measure fair value? I. Level I inputs are the most reliable fair value measurements and Level III inputs are the least reliable. II. Level I measurements are quoted prices in active markets for identical or similar assets or liabilities. III. A fair value measurement based on management assumptions only (no market data) would not be acceptable per GAAP. IV. The level in the fair value hierarchy of a fair value measurement is determined by the level of the highest level significant input. A. I only. B. I, II, and IV. C. II, III, and IV. D. I, II, III, and IV
Explanation Choice "C" is correct. Statement I is correct and statements II, III, and IV are incorrect. Statement II is incorrect because Level I measurements are quoted prices in active markets for identical assets or liabilities only. Quoted prices in active markets for similar assets or liabilities are Level II inputs. Statement III is incorrect because a fair value measurement based on management assumptions only is a Level III measurement and is acceptable when there are no Level I or Level II inputs or when undue cost or effort is required to obtain Level I or Level II inputs. Statement IV is incorrect because the level in the fair value hierarchy of a fair value measurement is determined by the level of the lowest level significant input. 19.0
13 CPA-04904 Farmer Joe sells corn at four exchanges, as follows: Bushels of Corn Sold at This Exchange Price Paid per Bushel of Corn Transaction Costs Exchange by Farmer Joe by All Suppliers per Bushel of Corn Illinois 4,000 1,000,000 $3.78 $0.06 Iowa 3,500 1,750,000 $3.75 $0.05 Michigan 2,800 2,000,000 $3.73 $0.02 Nebraska 3,200 1,400,000 $3.76 $0.07 For purposes of determining the fair value of Farmer Joe's corn, which exchange is the "principal" market? A. Illinois. B. Iowa. C. Michigan. D. Nebraska.
Explanation Choice "C" is correct. The "principal" market is the market with the greatest volume of activity for the particular asset for which fair value is being determined. Because the Michigan exchange had the greatest volume of corn purchases in total, the Michigan exchange is the principal market. This is true even though Farmer Joe sold more corn at other exchanges, as long as Farmer Joe had access to the principal market (which he did, since he did sell corn on the Michigan exchange). Choices "A", "B", and "D" are incorrect given the above explanation
8 CPA-07258 A company owns a financial asset that is actively traded on two different exchanges (market A and market B). There is no principal market for the financial asset. The information on the two exchanges is as follows: Quoted price of asset Transaction costs Market A $1,000 $75 Market B 1,050 150 What is the fair value of the financial asset? A. $900 B. $925 C. $1,000 D. $1,050
Explanation Choice "C" is correct. The price in the most advantageous market is used if there is no principal market. The most advantageous market is the market with the best price after considering transaction costs: Market A = $1,000 − $75 = $925 Market B = $1,050 − $150 = $900 Market A is the most advantageous market. Although transaction costs are used to determine the most advantageous market, transaction costs are not included in the final fair value measurement, so the fair value is the $1,000 quoted market price in Market A. Choice "A" is incorrect. Transaction costs are not included in the final fair value measurement. Additionally, Market A is the most advantageous market because it has the best price after considering transaction costs. Choice "B" is incorrect. Transaction costs are not included in the final fair value measurement. Choice "D" is incorrect. The most advantageous market is the market with the best price after considering transaction costs. Although transaction costs are used to determine the most advantageous market, transaction costs are not included in the final fair value measurement.
3 CPA-05410 There are multiple active markets for a financial asset with different observable market prices: Market Quoted Price Transaction Costs A $76 $5 B $74 $2 There is no principal market for the financial asset. What is the fair value of the asset? A. $71 B. $72 C. $74 D. $76
Explanation Choice "C" is correct. When there is no principal market, the price in the most advantageous market is the fair value measurement. Although transaction costs are not included in the fair value measurement, they are used to determine the most advantageous market, as follows: Market A: Net Price = Quoted Price - Transaction Costs = $76 - 5 = $71 Market B: Net Price = Quoted Price - Transaction Costs = $74 - 2 = $72 Because the net price in Market B is higher than the net price in Market A, Market B is the most advantageous market and the quoted price in Market B ($74) is the fair value of the asset. Choice "A" is incorrect. This is the net price in Market A. Fair value does not include transaction costs. Choice "B" is incorrect. This is the net price in Market B. This net price indicates that Market B is the most advantageous market, but the net price is not the fair value because fair value does not include transaction costs. Choice "D" is incorrect. If Market A were the principal market for the asset, then this would be the fair value of the asset. However, because there is no principal market, the price in the most advantageous market (Market B) is the price of the asset.
16 CPA-04908 Farmer Joe is trying to determine the fair value of his corn inventory. Which of the following would be considered a Level 3 input in this process? A. The quoted price for a bushel of corn at the Kansas exchange (an active exchange to which Farmer Joe has access). B. A quoted price for a bushel of sorghum (a crop that is similar to corn) at the Missouri exchange (an active exchange to which Farmer Joe has access). C. The discount rate Farmer Joe uses in determining the discounted cash flow value of his corn inventory. D. A quoted price for a bushel of corn at the Delaware exchange (an exchange to which Farmer Joe has access but which rarely buys corn).
Explanation Choice "C" is the correct choice. A Level 3 input is an unobservable input which reflects the reporting entity's assumptions. An assumed discount rate would be considered a Level 3 input. Choice "A" is incorrect. A Level 1 input is a quoted price on an active market for an identical asset; thus, the quote for a bushel of corn at the Kansas market would be considered a Level 1 input. Choice "B" is incorrect. A Level 2 input is an input other than a Level 1 input that is directly or indirectly observable and would include a quoted price for a similar asset in an active market. Thus, the quote for a bushel of sorghum, a crop that is similar to corn, at the Missouri exchange would be considered a Level 2 input. Choice "D" is incorrect. A Level 2 input is an input other than a Level 1 input that is directly or indirectly observable and would include a quoted price for an identical asset on an inactive market. Because it rarely buys the commodity in question (corn), the Delaware market would be considered an inactive market and the quote for a bushel of corn at the Delaware market would be considered a Level 2 input.
11 CPA-08606 Which of the following phrases best describes a Level 1 input for measuring the fair value of an asset or liability? A. Inputs for the asset or liability based on the reporting entity's internal data. B. Quoted prices for similar assets or liabilities in active markets. C. Inputs that are principally derived from or corroborated by observable market data. D. Unadjusted quoted prices for identical assets or liabilities in active markets
Explanation Choice "D" is correct. Level 1 inputs are quoted prices in active markets for identical assets and liabilities on the measurement dates when no adjustments are required. Choice "A" is incorrect. Inputs based on the reporting entity's internal data are examples of Level 3 inputs. Choice "B" is incorrect. Quoted prices for similar assets or liabilities in active markets are Level 2 inputs. Choice "C" is incorrect. Inputs that are principally derived from or corroborated by observable market data are examples of Level 2 inputs.
1 CPA-05407 Which of the following statements regarding fair value is/are correct? I. The fair value of an asset or liability is specific to the entity making the fair value measurement. II. Fair value is the price to acquire an asset or assume a liability. III. Fair value includes transportation costs, but not transaction costs. IV. The price in the principal market for an asset or liability will be the fair value measurement. A. I & II B. I & IV C. II & III D. III & IV
Explanation Choice "D" is correct. Statements III and IV are correct. Statement I is incorrect because fair value is a market-specific measure, not an entity-specific measure. Statement II is incorrect because fair value is an exit price (the price to sell an asset or transfer a liability), not an entrance price. Choices "A", "B" and "C" are incorrect, per the above explanation
15 CPA-04906 Farmer Joe owns farmland along a busy highway. Farmer Joe originally paid $500,000 for this land. The land sat on top of a reservoir of oil, which when pumped out resulted in total depletion expenses to Farmer Joe of $125,000. The farmland currently has a value of $600,000 if it is used as farmland; however, a developer who wants to build a shopping plaza on the farmland has offered Farmer Joe $850,000 for the farmland. What is the fair value of the farmland? A. $375,000 B. $500,000 C. $600,000 D. $850,000
Explanation Choice "D" is correct. The fair value of a nonfinancial asset is the value at its highest and best use. In this case, the highest and best use of the farmland is as a shopping plaza. Thus, the fair value is its value as a shopping plaza, or $850,000. Choice "A" is incorrect. The $375,000 represents the net book value of the farmland after subtracting accumulated depletion of $125,000. However, the fair value of a nonfinancial asset is its value at its highest and best use ($850,000, in this case), not its net book value. Choice "B" is incorrect. The $500,000 represents the original cost of the farmland. However, the fair value of a nonfinancial asset is its value at its highest and best use ($850,000, in this case), not its original cost. Choice "C" is incorrect. The $600,000 represents the value of the farmland in its current use as farmland. However, the fair value of a nonfinancial asset is its value at its highest and best use ($850,000, in this case), not its fair value in its current use.