Buy Accounting Issues Memorandum Assignment
Arsenio Investment, Inc. is a private company that invests in various financial and non-financial assets for its shareholders. Assets are measured at fair value at each reporting date. The chief investment officer (CIO) of the company has finalized the fair values for a number of investments as of December 31, 2020. They are as follows:
Marketable equity securities
Arsenio has an investment in 100,000 shares of common stock of a large public company whose stock is traded on the NYSE. The stock is currently valued in the accounting records at $25.00 per share ($2.5 million), which was the value at the last measurement date of September 30, 2020. The CIO is proposing to measure the fair value of the common stock at the bid price for the stock at the close of business on the measurement date of December 31, 2020, which is $27.50 per share. This valuation approach is consistent with what has been used in the past three years by management. Thus, the fair value is $2.75 million at year-end.
Private equity securities
Arsenio has an investment in 100,000 shares of common stock of a private company. There are no market quotes with respect to the fair value of the common stock; however, the private company’s operations, size and performance are similar to a company whose stock is traded on the NASDAQ. The CIO has taken some of the similar company’s market metrics, such as the price/earnings ratio of the common stock, a discounted earnings calculation and a few others, and has adjusted these metrics to reflect performance that he believes is better and more accurate of the metrics with which to value the private company and related investment. However, these revised metrics do not agree with the metrics of the similar public company or other companies in this industry.
Arsenio has an investment in a 10-acre parcel of land that is located near downtown Los Angeles that has just been remediated from an old oil spill. The carrying value of the land at September 30, 2020, was $1 million per acre, or $10 million, and is the equivalent of the cost of the land plus the costs to remediate the oil spill. The surrounding area consists of single-story warehouse facilities, which is consistent with the zoning of the area. The CIO believes that the land can be used to construct either a commercial warehouse or industrial manufacturing facility; the later requiring rezoning from the city. Recent similar sales of land within the area have been approximately $800,000 per acre. The CIO is valuing the land at $1 million per acre as he believes that with a rezoning and clever marketing, the land will sell for $1 million per acre in the future. Further, he says that management has the intent and ability to hold the land for a reasonable period of time and then sell it for $10 million. He thinks this is the highest and best use of the land.e
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