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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

Benefits of fair value

On July 16, 20Y1, Wyatt Corp. purchased 40 acres of land for $350,000. The land has been held for a future plant site until the current date, December 31, 20Y9. On December 18, 20Y9, TexoPete Inc. purchased 40 acres of land for $2,000,000 to be used for a distribution center. The TexoPete land is located next to the Wyatt Corp. land. Thus, both Wyatt Corp. and TexoPete Inc. own nearly identical pieces of land.

1. What are the valuations of land on the balance sheets of Wyatt Corp. and TexoPete Inc. using generally accepted accounting principles?

2. How might fair value accounting aid comparability when evaluating these two companies?

(1)

To determine

Cost principle: This is an accounting principle which states that the actual cost paid in receipt of the asset is the reliable measure and hence assets and services should be recorded at actual cost or historical cost.

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 indicate: The value at which the land bought by Company W and Company T, would be reported on the balance sheet

Explanation

According to GAAP, the land bought by Company W should be reported on the balance sheet at �...

(2)

To determine

To explain: How the reporting at fair value accounting would help in comparing the assets

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