What is the fair value option?
The fair option value is a special type of option by which the companies report their financial instrument on the fair value.
Fair value means the value of a financial instrument at the present date. It is a measure of the worth of a financial instrument.
This option allows companies to report all the financial instruments on fair value. Along with this, all the gains and losses related to the asset are reported in the income statement. A company can avail of this option only one time. The company avails this option on the occasion of its first purchase of the asset. According to this option, if the company uses this option on the instrument, the company reports this instrument on fair value until the date of ownership transfer.
(Comprehensive Intangible Assets) Montana Matt’s Golf Inc. was formed on July 1, 2016, when Matt Magilke purchased the Old Master Golf Company. Old Master provides video golf instruction at kiosks in shopping malls. Magik plans to integrate the instructional business into his golf equipment and accessory stores. Magik paid $770,000 cash for Old Master. At the time, Old Master’s balance sheet reported assets of $650,000 and liabilities of $200,000 (thus owners’ equity was $450,000). The fair value of Old Master’s assets is estimated to be $800,000. Included in the assets is the Old Master trade name with a fair value of $10,000 and copyright on some instructional books with a fair value of $24,000. The trade name has a remaining life of 5 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 40 years.
Expected Cash Flows (undiscounted)
Prepare the journal entries required, if any, to record impairments on Montana Matt’s intangible assets. (Assume that any amortization for 2018 has been recorded.) Show supporting computations.
Hendricks Corporation purchased trading investment bonds for $50,000 at par. On December 31, Hendricks received an annual interest of $2,000, and the fair value of the bonds was $47,400. Prepare Hendricks’ journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)
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