Recording investments at fair value may provide a measure of income similar to that if investments...

 

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Recording investments at fair value may provide a measure of income similar to that if investments were stated at amortized historical cost, but is it consistent with the "measurable and available" criteria? On August 2, 30 days prior to the end of its August 31 fiscal year, a government issues $3 million of general obligation bonds. The proceeds are being accounted for in a capital projects fund (a governmental fund). To earn a return on the bond proceeds before they have to be spent, the government invests $1 million in each of three financial instruments: • A 60-day discount note with a face value of $1,010,000. The note pays no interest. The purchase price of the note is $1 million (a price that provides an annual yield of 6 percent-0.5 percent per month). • A two-year note that pays interest at an annual rate of 6 percent. Both interest and principal are payable upon the maturity of the note. • Shares in an investment pool of government debt securities that provide a fixed return of 6 percent per year. The pool pays no dividends; the returns are reflected as an increase in the value of the shares. 1. Assuming no changes in prevailing interest rates between the date of purchase and year-end, what would you expect to be the fair (i.e., market) value of each of the three investments? Explain. 2. Prepare journal entries, as appropriate, to record investment income and changes in fair values as of the year ending August 31. 3. Why might it be said that your entry for the two-year note is inconsistent with the general rule for fund statements that revenues should be recognized only when they are "measurable" and "available?" Why might it also be argued that your entry is perfectly consistent with the rule? Recording investments at fair value may provide a measure of income similar to that if investments were stated at amortized historical cost, but is it consistent with the "measurable and available" criteria? On August 2, 30 days prior to the end of its August 31 fiscal year, a government issues $3 million of general obligation bonds. The proceeds are being accounted for in a capital projects fund (a governmental fund). To earn a return on the bond proceeds before they have to be spent, the government invests $1 million in each of three financial instruments: • A 60-day discount note with a face value of $1,010,000. The note pays no interest. The purchase price of the note is $1 million (a price that provides an annual yield of 6 percent-0.5 percent per month). • A two-year note that pays interest at an annual rate of 6 percent. Both interest and principal are payable upon the maturity of the note. • Shares in an investment pool of government debt securities that provide a fixed return of 6 percent per year. The pool pays no dividends; the returns are reflected as an increase in the value of the shares. 1. Assuming no changes in prevailing interest rates between the date of purchase and year-end, what would you expect to be the fair (i.e., market) value of each of the three investments? Explain. 2. Prepare journal entries, as appropriate, to record investment income and changes in fair values as of the year ending August 31. 3. Why might it be said that your entry for the two-year note is inconsistent with the general rule for fund statements that revenues should be recognized only when they are "measurable" and "available?" Why might it also be argued that your entry is perfectly consistent with the rule?

Answer rating: 100% (QA)

1 The interest rate on the twoyear note may change before it matures making it difficult to estimate ... View the full answer