| Posted: 24 Jan 2011 at 18:44 | IP Logged
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I got the questions right but I was looking at the answers and they are not what I was thinking. Could some one explain why there would be a loss in the first question and a gain in the second question? I thought it would be the opposite.
On January 2, 2008, the beginning of its fiscal year, Seaco
appropriately elected to report certain of its newly acquired long-term
payables at fair value. At that time, those payables had a carrying value of
$33,000 and a fair value of $30,000. On December 31, 2008, the payables had a
fair value of $31,000. Which one of the following is the amount of gain or loss
from the fair value election that will be recognized in Seaco's income for
2008?
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B.
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$1,000
Correct!
At the date of election (January 2), the payables were
adjusted to the then fair value ($30,000). At each subsequent reporting date,
the payables will be adjusted to fair value as of that date and any resulting
gain or loss will be reported in the income of the period during which the
fair value changes. Thus, the loss to be recognized at December 31, 2008 is
the difference between fair value of the liability on January 2 ($30,000) and
its fair value on December 31 ($31,000), a loss of $1,000.
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On January 2, 2008, the beginning of its fiscal year, Seaco
appropriately elected to report certain of its newly acquired long-term
payables at fair value. At that time, those payables had a carrying value of
$33,000 and a fair value of $30,000. On December 31, 2008, the payables had a
fair value of $31,000. Which one of the following is the amount of gain or loss
from the fair value election that will be recognized on January 2, 2008, when
Seaco makes its fair value election?
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D.
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$3,000
Correct!
Seaco must recognize at the time of the election a gain of $3,000 resulting from
writing the payables down to a lower fair value, computed as carrying value
$33,000 – fair value $30,000 = $3,000.
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Topic: Why is this? Fair Value Option
Topic Closed)
