ACCT 531 - ACCOUNTING
INFORMATION SYSTEMS - Fair
Value Measurement Question Bank with
Complete Detailed Solutions 2026- Set 5
Liberty University
Question 1
Question
A company holds an investment in a start-up company which operates in a highly
volatile industry. The start-up company’s financial statements indicate a fair
value of the investment of $500,000. However, the company’s management is
uncertain about the start-up’s future performance and market conditions. As a
result, they believe that a range of possible fair values exists, with a conservative
estimate at $450,000 and an optimistic estimate at $550,000. Calculate the fair
value measurement for the investment using the three-level hierarchy provided
by IFRS 13.
Solution
To calculate the fair value measurement using the three-level hierarchy provided
by IFRS 13, we need to determine at which level of the hierarchy the fair value
falls.
Step 1: Level 1 input is quoted prices in active markets for identical assets or
liabilities that the entity can access at the measurement date.
Since the start-up company operates in a highly volatile industry, there are no
active markets for identical investments. Therefore, the fair value does not fall
within Level 1.
Step 2: Level 2 input is inputs, other than quoted prices included in Level 1,
that are observable for the asset or liability, either directly or indirectly.
Since the fair value of $500,000 is based on the start-up company’s financial
statements, which are observable inputs, the fair value does not fall within Level
2.
Step 3: Level 3 input is unobservable inputs for the asset or liability.
Given that the company’s management has provided a range of possible fair
values based on their own estimates (from $450,000 to $550,000), this falls
,under unobservable inputs. Therefore, the fair value of $500,000 falls within
Level 3 of the hierarchy.
The fair value measurement for the investment in the start-up company is at
Level 3 of the hierarchy, as it is based on unobservable inputs provided by the
company’s management.
Question 2
Question
A company holds an investment in a privately held company and measures the
fair value of the investment using Level 3 inputs. The fair value measurement
includes significant unobservable inputs that require estimation and judgement.
Discuss the challenges faced by the company in determining the fair value of this
investment.
Solution
To determine the fair value of an investment using Level 3 inputs with significant
unobservable inputs, the company faces several challenges. Here are the key
challenges faced by the company:
Step 1: Lack of Market Data The lack of active markets for the investment
can make it difficult to obtain relevant and reliable market-based data to
determine the fair value. In the absence of observable market prices, the
company must rely on its own assumptions and estimates, increasing the
subjectivity of the fair value measurement.
Step 2: Complexity of Models Using Level 3 inputs often involves using
complex valuation models to estimate the fair value. These models may require
expertise in financial modeling and valuation techniques, as well as a deep
understanding of the underlying asset and industry dynamics. Inaccurate or
inappropriate models can lead to misstated fair values.
Step 3: Estimation Uncertainty Significant unobservable inputs introduce
uncertainty into the fair value measurement. The company must make
reasonable assumptions and estimates based on the best information available,
but these estimates may be subject to bias or error. The company needs to
carefully document and disclose these uncertainties in its financial statements.
Step 4: Judgement and Subjectivity Determining the fair value of an
investment with Level 3 inputs requires judgement and subjectivity on the part
of the company’s management. Different individuals may have different opinions
on the fair value, leading to a range of possible outcomes. Management’s bias or
incentives can also influence the fair value measurement.
Step 5: Risk of Manipulation The subjective nature of fair value
measurement using Level 3 inputs can create opportunities for manipulation or
bias in financial reporting. Companies may be tempted to use aggressive
2
,assumptions to inflate the fair value of investments, leading to misleading
financial statements.
In conclusion, companies face various challenges when measuring the fair
value of investments using Level 3 inputs with significant unobservable inputs. It
is crucial for companies to exercise caution, transparency, and diligence in the
fair value measurement process to ensure the accuracy and reliability of their
financial statements.
Question 3
Question
A company holds an investment in a financial asset classified as a level 3 fair
value measurement. At the end of the reporting period, the fair value of the
investment has decreased from 135,000to120,000. The company’s policy is to
recognize unrealized gains and losses in other comprehensive income. Prepare
the journal entry to record the change in fair value of the investment.
Solution
To record the change in fair value of the investment, we need to determine the
unrealized loss and recognize it in other comprehensive income. Step 1:
Calculate the unrealized loss:
Unrealized loss = Fair value at the end − Fair value at the beginning
Unrealized loss = $120,000 − $135,000 = −$15,000 Step
2: Prepare the journal entry:
Other comprehensive income →$15,000
Investment in financial asset →$15,000
Therefore, the journal entry to record the change in fair value of the
investment is:
Other comprehensive income $15,000
Investment in financial asset $15,000
Question 4
Question
A company holds an investment in a financial asset that is classified as a Level 3
fair value measurement. The fair value of the investment at the beginning of the
year was
3
, 10,000.Duringtheyear,therewereobservablechangesinmarketconditionsthatrequire
danadjustmentt at the end of the year.
Assuming this investment is the only Level 3 fair value measurement the
company holds, calculate the unrealized gain or loss that the company should
recognize in its financial statements at the end of the year.
Solution
Step 1: Calculate the Unrealized Gain/Loss To calculate the unrealized gain or
loss, we compare the fair value of the investment at the end of the year to its fair
value at the beginning of the year.
Given: Fair value of investment at the beginning of the year = 10,000Fairvalueofinvestmentattheendo
The unrealized gain or loss is calculated as: Unrealized Gain/Loss = Fair value
at end of year - Fair value at beginning of year
Substitute the given values: Unrealized Gain/Loss = 8,500−10,000 Unrealized
Gain/Loss = -1,500
Therefore, the company should recognize an unrealized loss of 1,500initsfinancialstatementsattheendo
Question 5
Question
A company holds an investment in a bond with a face value of 10,000thatpaysanannualcouponrateof5
Solution
Step 1: Calculate the annual coupon payment. The annual coupon payment is
calculated as 5
Coupon Payment = 0.05 × 10,000 = 500
Step 2: Determine the present value of the bond’s cash flows. The present
value of the bond’s cash flows consists of the present value of the coupon
payments and the present value of the face value received at maturity. Since the
bond is trading at a yield of 4
The present value of the annual coupon payments can be calculated using the
formula for the present value of an ordinary annuity:
PV of Coupon Payments =
Step 3: Calculate the fair value of the bond. The fair value of the bond is the
sum of the present value of the coupon payments and the present value of the
face value:
Fair Value = PV of Coupon Payments +
4
INFORMATION SYSTEMS - Fair
Value Measurement Question Bank with
Complete Detailed Solutions 2026- Set 5
Liberty University
Question 1
Question
A company holds an investment in a start-up company which operates in a highly
volatile industry. The start-up company’s financial statements indicate a fair
value of the investment of $500,000. However, the company’s management is
uncertain about the start-up’s future performance and market conditions. As a
result, they believe that a range of possible fair values exists, with a conservative
estimate at $450,000 and an optimistic estimate at $550,000. Calculate the fair
value measurement for the investment using the three-level hierarchy provided
by IFRS 13.
Solution
To calculate the fair value measurement using the three-level hierarchy provided
by IFRS 13, we need to determine at which level of the hierarchy the fair value
falls.
Step 1: Level 1 input is quoted prices in active markets for identical assets or
liabilities that the entity can access at the measurement date.
Since the start-up company operates in a highly volatile industry, there are no
active markets for identical investments. Therefore, the fair value does not fall
within Level 1.
Step 2: Level 2 input is inputs, other than quoted prices included in Level 1,
that are observable for the asset or liability, either directly or indirectly.
Since the fair value of $500,000 is based on the start-up company’s financial
statements, which are observable inputs, the fair value does not fall within Level
2.
Step 3: Level 3 input is unobservable inputs for the asset or liability.
Given that the company’s management has provided a range of possible fair
values based on their own estimates (from $450,000 to $550,000), this falls
,under unobservable inputs. Therefore, the fair value of $500,000 falls within
Level 3 of the hierarchy.
The fair value measurement for the investment in the start-up company is at
Level 3 of the hierarchy, as it is based on unobservable inputs provided by the
company’s management.
Question 2
Question
A company holds an investment in a privately held company and measures the
fair value of the investment using Level 3 inputs. The fair value measurement
includes significant unobservable inputs that require estimation and judgement.
Discuss the challenges faced by the company in determining the fair value of this
investment.
Solution
To determine the fair value of an investment using Level 3 inputs with significant
unobservable inputs, the company faces several challenges. Here are the key
challenges faced by the company:
Step 1: Lack of Market Data The lack of active markets for the investment
can make it difficult to obtain relevant and reliable market-based data to
determine the fair value. In the absence of observable market prices, the
company must rely on its own assumptions and estimates, increasing the
subjectivity of the fair value measurement.
Step 2: Complexity of Models Using Level 3 inputs often involves using
complex valuation models to estimate the fair value. These models may require
expertise in financial modeling and valuation techniques, as well as a deep
understanding of the underlying asset and industry dynamics. Inaccurate or
inappropriate models can lead to misstated fair values.
Step 3: Estimation Uncertainty Significant unobservable inputs introduce
uncertainty into the fair value measurement. The company must make
reasonable assumptions and estimates based on the best information available,
but these estimates may be subject to bias or error. The company needs to
carefully document and disclose these uncertainties in its financial statements.
Step 4: Judgement and Subjectivity Determining the fair value of an
investment with Level 3 inputs requires judgement and subjectivity on the part
of the company’s management. Different individuals may have different opinions
on the fair value, leading to a range of possible outcomes. Management’s bias or
incentives can also influence the fair value measurement.
Step 5: Risk of Manipulation The subjective nature of fair value
measurement using Level 3 inputs can create opportunities for manipulation or
bias in financial reporting. Companies may be tempted to use aggressive
2
,assumptions to inflate the fair value of investments, leading to misleading
financial statements.
In conclusion, companies face various challenges when measuring the fair
value of investments using Level 3 inputs with significant unobservable inputs. It
is crucial for companies to exercise caution, transparency, and diligence in the
fair value measurement process to ensure the accuracy and reliability of their
financial statements.
Question 3
Question
A company holds an investment in a financial asset classified as a level 3 fair
value measurement. At the end of the reporting period, the fair value of the
investment has decreased from 135,000to120,000. The company’s policy is to
recognize unrealized gains and losses in other comprehensive income. Prepare
the journal entry to record the change in fair value of the investment.
Solution
To record the change in fair value of the investment, we need to determine the
unrealized loss and recognize it in other comprehensive income. Step 1:
Calculate the unrealized loss:
Unrealized loss = Fair value at the end − Fair value at the beginning
Unrealized loss = $120,000 − $135,000 = −$15,000 Step
2: Prepare the journal entry:
Other comprehensive income →$15,000
Investment in financial asset →$15,000
Therefore, the journal entry to record the change in fair value of the
investment is:
Other comprehensive income $15,000
Investment in financial asset $15,000
Question 4
Question
A company holds an investment in a financial asset that is classified as a Level 3
fair value measurement. The fair value of the investment at the beginning of the
year was
3
, 10,000.Duringtheyear,therewereobservablechangesinmarketconditionsthatrequire
danadjustmentt at the end of the year.
Assuming this investment is the only Level 3 fair value measurement the
company holds, calculate the unrealized gain or loss that the company should
recognize in its financial statements at the end of the year.
Solution
Step 1: Calculate the Unrealized Gain/Loss To calculate the unrealized gain or
loss, we compare the fair value of the investment at the end of the year to its fair
value at the beginning of the year.
Given: Fair value of investment at the beginning of the year = 10,000Fairvalueofinvestmentattheendo
The unrealized gain or loss is calculated as: Unrealized Gain/Loss = Fair value
at end of year - Fair value at beginning of year
Substitute the given values: Unrealized Gain/Loss = 8,500−10,000 Unrealized
Gain/Loss = -1,500
Therefore, the company should recognize an unrealized loss of 1,500initsfinancialstatementsattheendo
Question 5
Question
A company holds an investment in a bond with a face value of 10,000thatpaysanannualcouponrateof5
Solution
Step 1: Calculate the annual coupon payment. The annual coupon payment is
calculated as 5
Coupon Payment = 0.05 × 10,000 = 500
Step 2: Determine the present value of the bond’s cash flows. The present
value of the bond’s cash flows consists of the present value of the coupon
payments and the present value of the face value received at maturity. Since the
bond is trading at a yield of 4
The present value of the annual coupon payments can be calculated using the
formula for the present value of an ordinary annuity:
PV of Coupon Payments =
Step 3: Calculate the fair value of the bond. The fair value of the bond is the
sum of the present value of the coupon payments and the present value of the
face value:
Fair Value = PV of Coupon Payments +
4
