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Chapter 7: Question ISTQ5 (page 385)

Which of the following statements is true?

(a) The fair value option requires that some types of financial instruments be recorded at fair value.

(b) The fair value option requires that all noncurrent financial instruments be recorded at amortized cost.

(c) The fair value option allows, but does not require, that some types of financial instruments be recorded at fair value.

(d) The FASB and IASB would like to reduce the reliance on fair value accounting for financial instruments in the future.

Short Answer

Expert verified

Thecorrect option is c.

Step by step solution

01

Definition of Future Options

Security providing the rights to its holder to purchase or sell a security on a specified date at some specified price is known as a future option.

02

Explanation for Correct Option

The fair value option allows business entities to report the financial instruments at their fair value; it does not make it mandatory to report all financial instruments at their fair value. Thus, option c is correct.

03

Explanation for Incorrect Options

(a) Option a is incorrect under the fair value option. All financial instruments held by the business entity must be reported at their fair value.

(b) Option b is incorrect because the fair value option states that all the financial instruments must be declared at their fair value.

(d) FASB and IASB rely on fair value measurement of financial instruments to increase transparency and understandability. Therefore, option d is incorrect.

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Most popular questions from this chapter

Roeher Company sold \(9,000 of its specialty shelving to Elkins Office Supply Co. on account. Prepare the entries when (a) Roeher makes the sale, (b) Roeher grants an allowance of \)700 when some of the shelving does not meet exact specifications but still could be sold by Elkins, and (c) at year-end; Roeher estimates that an additional $200 in allowances will be granted to Elkins.

What are the basic problems that occur in the valuation of accounts receivable?

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(b) Receivables include credit card receivables.

(c) Receivables include amounts owed by employees as a result of company loans to employees.

(d) Receivables include amounts resulting from transactions with customers.

Finman Company designated Jill Holland as petty cash custodian and established a petty cash fund of \(200. The fund is reimbursed when the cash in the fund is at \)15, which it is. Petty cash receipts indicate funds were disbursed for office supplies \(94 and miscellaneous expense \)87. Prepare journal entries for the establishment of the fund and the reimbursement.
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