Question #1 (AICPA.

090424FAR-SIM)

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

This incorrect answer ($75,000 and $35,000) results from using the fair value at the
date of the intercompany transaction as the basis for reporting in consolidated
statements. 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.)
$55,000 $55,000

$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.)
$50,000 $60,000

Question #2 (AICPA.090423FAR-SIM)

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 Papa record the land and building on its
books at the date of the transaction?

Land Building
$75,000 $35,000

Papa should record the land and building on its books at the appropriately determined
fair value at the date of the transaction. The prior carrying values on Sonny's books
are not relevant to the amounts at which Papa should record the assets on its books,
but are relevant to the amounts that should be reported in the consolidated financial
statements.
$55,000 $55,000

$60,000 $50,000

$50,000 $60,000
Question #3 (AICPA.090422FAR-SIM)

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.

A. I only.

B. II only.

C. Both I and II.

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.
D. Neither I nor II.

Question #4 (AICPA.120618FAR)
Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting
future cash flows of the asset. Which of the following terms best describes this fair value
measurement approach?
A. Market.

B. Income.

The income approach to fair value measurement of an asset measures fair value by
converting future amounts to a single present amount. Discounting future cash flows
would be an income approach to determining fair value.
C. Cost.

D. Observable inputs.

Question #5 (AICPA.080128FAR-FVF)

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.

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).
D. As gain on the income statement for the period of change in approach.
 The amount of a change in fair value resulting from a change in the valuation
approach used to determine fair value would be reported as a change in accounting
estimate.
Question #6 (AICPA.080126FAR-FVF)

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.

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.
D. Market approach.

Question #7 (AICPA.080124FAR-FVF)

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

Not only is an exit price the appropriate basis for determining the fair value of a
liability, an exit price is also the appropriate basis for determining the fair value of an
asset.
Exit price Entry price

Exit price Exit price

The appropriate basis for determining the fair value of an asset or a liability is an exit
price.
Question #8 (AICPA.080125FAR-FVF)

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.

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.
D. Land and a building are acquired in the open market by giving a mortgage to a lender.

Question #9 (AICPA.090407FAR-SIM)
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

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.
Question #10 (AICPA.090406FAR-SIM)
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.

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.
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.

Question #11 (AICPA.090408FAR-SIM)

Alphaco has two subsidiaries, Betaco and Charlieco, both of which are consolidated by
Alphaco. Alphaco and Betaco have elected to measure their respective investments held-to-
maturity at fair value. Charlieco measures its investments held-to-maturity using amortized
cost. In its consolidated financial statements, for which companies, if any, may Alphaco
elect to report investment held-to-maturity at fair value?
A. Alphaco only.

B. Alphaco and Betaco only.

As the parent, Alphaco may elect to report not just its own investments held-to-
maturity and those of Betaco at fair value, but all of the investments held-to-maturity
at fair value in its consolidated statements (only), whether or not the fair value option
was elected by its subsidiaries for their separate books and any separate reporting
purposes.
C. Alphaco, Betaco, and Charlieco.

As the parent, Alphaco may elect to report all of the investments held-to-maturity at
fair value in its consolidated statements (only), whether or not the fair value option
was elected by its subsidiaries for their separate books and any separate reporting
purposes.
 D. None of the companies; all investments held-to-maturity must be measured and reported at
amortized cost.
Question #12 (080107FAR-FVO)

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

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.
B. January 31, 2008

C. March 31, 2008

D. December 31, 2008

Question #13 (AICPA.080106FAR-FVO)

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.

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.
D. Accounts payable.

Question #14 (AICPA.090429FAR-SIM)

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 neither Front market nor Side market is a 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

Since neither market is the principal market for the security, Marco must determine
the most advantageous market, which is the market in which the asset could be sold
at a price that maximizes the amount that would be received. Marco would receive
$52/sh - $6/sh = $46/sh in Front market and would receive $50/sh - $1/sh = $49/sh
in Side market. Therefore, Side market is its most advantageous market, and fair value
would be determined in that market as the price at which the security could be sold,
or $50/sh. The market selling price would not be adjusted for the related direct
transaction cost, even though it enters into determining the most advantageous
market.
C. $49/sh

This incorrect answer ($49/sh) results from using the selling price in Side market,
which is its most advantageous market, but incorrectly subtracting the transaction
cost, or $50/sh - $1/sh = $49/sh. Since neither market is the principal market for the
security, Marco must determine the most advantageous market, which is the market in
which the asset could be sold at a price that maximizes the amount that would be
received. Marco would receive $52/sh - $6/sh = $46/sh in Front market and would
receive $50/sh - $1/sh = $49/sh in Side market. Therefore, Side market is its most
advantageous market, and fair value would be determined in that market as the price
at which the security could be sold, or $50/sh, not $49. The market selling price would
not be adjusted for the related direct transaction cost, even though it enters into
determining the most advantageous market.
D. $46/sh

Question #15 (AICPA.090428FAR-SIM)

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

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.
B. $50/sh

C. $49/sh

This incorrect answer ($49/sh) results from using the selling price in Side market,
rather than Front market, and incorrectly subtracts the transaction cost (i.e., $50/sh -
$1/sh = $49/sh). Since Front, not Side, 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.
D. $46/sh
Question #16 (AICPA.090427FAR-SIM)

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.

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.
C. Expense approach.

D. Market approach.

Question #17 (AICPA.090426FAR-SIM)

Multico is a securities dealer whose principal market is with other securities dealers. To
take advantage of a perceived opportunity, on December 31, the end of its fiscal year,
Multico acquired a financial asset in a market other than its principal market for $50,000. At
that date, the identical instrument could be sold in Multico's principal market for $50,100
with a $200 transaction cost. Which of the following amounts would constitute fair value to
Multico for the financial asset at December 31?

A. $49,800

B. $49,900

C. $50,000

This incorrect answer ($50,000) results from using Multico's purchase price (an entry
price) as the presumed fair value of the asset. Since fair value is based on an exit
price, the amount at which Multico could have sold the asset in its principal market is
its fair value to Multico. Since the asset could have been sold by Multico in its principal
market for $50,100, that is its fair value to Multico.
D. $50,100

Since fair value is based on an exit price, the amount at which Multico could have sold
the asset in its principal market is its fair value to Multico. Since the asset could have
been sold by Multico in its principal market for $50,100, that is its fair value to
Multico. The transaction cost to execute the sale should not be deducted from the
market price to get fair value.
Question #18 (AICPA.090425FAR-SIM)

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.
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.
B. II only.

If an asset was acquired in an active exchange market (e.g., New York Stock Exchange
or other broad, public market), an auditor likely would not be especially concerned as
to whether or not the price paid to acquire the asset was fair value of the asset. In
most cases, prices established in an active market provide the most reliable evidence
of fair value.
C. Both I and II.

D. Neither I nor II.