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Testbank

to accompany

Contemporary Issues in
Accounting

Michaela Rankin, Patricia Stanton,


Susan McGowan, Matthew Tilling,
Kimberly Ferlauto & Carol Tilt

Prepared by
Matt Tilling

John Wiley & Sons Australia, Ltd 2012


Testbank to accompany Contemporary Issues in Accounting

Chapter 10 Fair Value Accounting


Multiple Choice Questions

1. Fair value accounting:

a. Is a new concept
b. Is currently rare in accounting standards
*c. Appears in many accounting standards
d. Is simply a refinement to the definition of historic cost

Correct answer: c
Learning Objective 10.1 ~ Discuss the role of fair value in accounting.

2. AASB 13 Fair Value Accounting has an effective date of:

a. July 2005
b. July 2011
*c. January 2013
d. January 2015

Correct answer: c
Learning Objective 10.1 ~ Discuss the role of fair value in accounting.

3. Traditionally what measurement technique has been most commonly used

*a. Modified historical cost


b. Fair value
c. Replacement cost
d. Sales value

Correct answer: a
Learning Objective 10.1 ~ Discuss the role of fair value in accounting.

4. Which part of the asset definition supports the use of fair value accounting?

a. Control
b. Relevance and reliability
*c. Future economic benefit
d. Past transaction

Correct answer: c
Learning Objective 10.1 ~ Discuss the role of fair value in accounting.

John Wiley & Sons Australia, Ltd 2012 10.1


Chapter 10 Fair Value Accounting

5. Which of the following is NOT part of the old definition of fair value?

a. The amount an asset could be exchanged for


b. The amount a liability could be settled for
c. An arms-length transaction
*d. At measurement date

Correct answer: d
Learning Objective 10.2 ~ Evaluate the traditional definition of fair value.

6. Which of the following has NOT been identified as a problem with the old definition
of fair value

a. The word exchange is unclear


b. The word settle is potentially misleading
c. The word willing is not always ideal
*d. None of the above, i.e. they are all criticisms

Correct answer: d
Learning Objective 10.2 ~ Evaluate the traditional definition of fair value.

7. Which of the following is NOT one of the reasons given for issuing IFRS 13?

*a. To replace the use of historical cost


b. To enhance disclosure
c. To clarify the definition of fair value
d. To provide a single source of guidance on the use of fair value

Correct answer: a
Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

8. IFRS 13 is considered

a. To clarify our current use of fair value


b. To be a revolutionary standard
*c. To be an evolutionary standard
d. To be a regression from previous practice

Correct answer: c
Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

9. Which of the following is not part of the definition of fair value under AAASB 13?

a. Price received to sell an asset


b. Price paid to sell a liability
*c. Knowledgeable and willing parties
d. At measurement date

Correct answer: c
Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

John Wiley & Sons Australia, Ltd 2012 10.2


Testbank to accompany Contemporary Issues in Accounting

10. Why does the new definition focus on an exit price when valuing and asset or
liability?

a. It focuses on the current value


b. It is specific to the item being considered
c. It introduces the concept of an external party into the transaction
*d. All of the above

Correct answer: d
Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

11. Which two economic concepts are fundamental to the relevance of fair values to
accounting?
i. The Efficient Markets Hypothesis
ii. Supply and Demand
iii. Economic Rationalism
iv. Marginal Utility

a. i. & ii.
b. ii. & iv.
*c. i. & iii.
d. iii. & iv.

Correct answer: c
Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

12. Which of the following would NOT indicate that market is inactive?

a. Little information is publicly available


b. Price quotations don't reflect current information
*c. The bid-ask spread is narrow
d. Indices are demonstrably uncorrelated with recent indications of fair
valuation

Correct answer: c
Learning Objective 10.3 ~ Describe the key aspects of the new definition of fair value.

13. When fair valuing a motor vehicle which of the following is least likely to be
important?

a. Age
b. Make and model
*c. Colour
d. Kilometres travelled

Correct answer: c
Learning Objective 10.4 ~ Explain how fair value should be determined for assets and
liabilities.

John Wiley & Sons Australia, Ltd 2012 10.3


Chapter 10 Fair Value Accounting

14. When valuing non-financial assets which use for the asset should be considered

*a. The asset's highest and best use


b. The asset's current use
c. The asset's expected use
d. None of the above

Correct answer: a
Learning Objective 10.4 ~ Explain how fair value should be determined for assets and
liabilities.

15. When fair valuing a liability which factor should NOT be considered?

a. Non-performance risk
b. The fair value of the corresponding asset
c. Expectations of the market about fulfilling the obligation
*d. None of the above, i.e. they are all factors to consider

Correct answer: d
Learning Objective 10.4 ~ Explain how fair value should be determined for assets and
liabilities.

16. Which of the following is not an acceptable valuation technique

a. The income approach


b. The cost approach
*c. The expert evaluation approach
d. None of the above, i.e. they are all acceptable valuation techniques

Correct answer: c
Learning Objective 10.5 ~

17. Which of the following would most likely be valued using a level 2 valuation?

a. Gold
*b. A building
c. Shares
d. A business unit

Correct answer: b
Learning Objective 10.5 ~ Describe the three valuation techniques and the importance of the
input hierarchy.

John Wiley & Sons Australia, Ltd 2012 10.4


Testbank to accompany Contemporary Issues in Accounting

18. Which of the following information must be provided in the financial report about
level 3 fair valuations

a. A description of the valuation technique used


b. If the asset is not being used for its highest and best use why this is the case
c. Quantitative information on the inputs used in the model
*d. All of the above

Correct answer: d
Learning Objective 10.6 ~ Apply the general disclosure requirements for items measured at
fair value.

19. Which of the following is NOT a transaction cost that should be considered in the
calculation of fair value?

*a. Transport costs


b. Agent's selling fees
c. Costs associated with marketing the item
d. None of the above, i.e. they are all transaction costs

Correct answer: a
Learning Objective 10.5 ~ Describe the three valuation techniques and the importance of the
input hierarchy.

20. Where there is a difference between fair value at initial recognition and cost,
assuming no other standard prohibits it, the entity should

a. Ignore the difference as there should be no day one gain or loss


b. Amortise the difference over the useful life of the item
*c. Immediately adjust the value and recognise profit or loss
d. Pay more or less for the item to make the figures equal

Correct answer: c
Learning Objective 10.6 ~ Apply the general disclosure requirements for items measured at
fair value.

John Wiley & Sons Australia, Ltd 2012 10.5