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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

How are the balance sheet and income statement affected by fair value accounting?

To determine

Fair value: Fair value is the price at which, both seller and buyer agree to exchange the asset. So, fair value is the selling price to the seller and the purchase price for the buyer.

Fair value accounting: Fair value accounting is the accounting method used to report the trading and available-for-sale investments at fair value. This is mandatory as per generally accepted accounting principles (GAAP).

To describe: The effect of fair value accounting on balance sheet and income statement

Explanation

Effect of fair value accounting on balance sheet and income statement:

  • When a company follows fair value accounting method, the changes in fair value of assets should be reported. This difference between the book value of asset and fair value should be reported.
  • The valuation account, Valuation Allowance of Trading Investments is used for reporting the changes in fair value of trading investments...

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