2014 FASB Update Intermediate Accounting (15th Edition) Edit edition

This problem has been solved:

Solutions for Chapter 6…

J Company should record the note receivable at its present value of $670,591.65 on the day the customer takes the delivery of the damaged inventory.

Analysis:

If the interest rate increases the fair value of receivables will decrease because as the company receives equal payment at a regular interval for next 10 years, rise in interest rate will result in lower worth of future cash flow. Future cash flow will be discounted at higher rate and therefore the present value of receivable will decline.

Principle:

There is a tradeoff between relevance and reliability. It is relevant to show assets and liabilities at Fair value as it provides information about the current value of assets and liabilities but at the same time it is based on certain estimates related to discount rate and time and amount of future cash flow and therefore the reliability is at stake.

Recording the transaction at historical cost is more reliable as it is based on actual transaction but the relevance of historical cost declines as the transaction is further moved.