[Ramana]

Can someone help me understand this? The answer is 81 but I dont understand why you would add $1 when transaction cost is not counted in FV?

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Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset

[Troys22]

When there are multiple markets, you have the use the most advantageous market. The most advantageous market is the one with the higher selling price. Also, FV excludes transaction costs so in this problem the $80 is net of the transaction costs of $1 so you have to add back that cost to arrive at $81. Because it says NET that means it is included in FV before adding it back.

AUD - 80
BEC - 79
FAR - 77
REG - 83

Troy

[Anonymous]

Agree with Troys

[Ramana]

Still isn't clicking. Why add back $1?

[turo9992000]

The asset trades at $81. The transaction costs are deducted after the trade. It's kind of a trick question, in the first market the asset trades at $82, which is the higher of the 2, but because the transaction costs are higher the actual proceeds are $76.

The FV is either $82 or $81 because that are the actual amounts they are trading at. The question gives you net amounts after transaction costs. You add back the $1 because the the asset is actually trading in the 2 markets at those prices.

AUD - 64, 80 Passed on 10/09/17

BEC - 75 Passed on 12/09/17

FAR - 69, 71, 73, 83 Passed on 06/10/18

REG - 81 Passed on 09/10/17

[Accounting123]

My notes may help as well:
– IF there is no PRINCIPAL MARKET – Use the most advantageous market
1) Market with best price for asset OR
Quoted stock price – transaction costs = net (pick largest)
2) Liability after considering transaction costs
– NOTE: Transaction costs ARE used to determine the most advantageous market. BUT NOT included in final FV measurement
ORDER (example):
1) First use principal market
– Pick market based on greatest level of volume IN TOTAL
– AS long as the investor has ACCESS to principal market pick one with greatest volume in TOTAL
2) If NO principal market use most advantageous market
– Pick market by the best-selling price AFTER subtracting transaction costs
– When you pick the FV above, you then ignore transaction costs (just used to help make decision) and the FV is the quoted stock price
– In the example you asked about. You would use the most advantageous market. You have to first, pick the market by subtracting out transaction costs. But the example already did that for you. So you pick the largest which is 80. But then the actual FV you use, is the 80 + the 1$ transaction costs because you add it back.

[Ramana]

I'm going to read this over and over till it clicks. thank you so much!!

[Ramana]

@Accounting123: Love your note taking skills. Concise, yet convey the point. What material do you use? I have Wiley which is detailed and my notes end up getting lengthy as well

[Accounting123]

@ramana thank you!! I use becker, so I go through and I type up pretty much everything they highlight in the book. And then I go back again and study the material and take out some of the details which I feel aren't necessary!

[Author]

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