Problem Six: Fair Value Accounting
ABC Co At the End of Year 1, the Building Is Valued

Problem Six: Fair Value Accounting
ABC Co. starts its business raising $110,000 in cash; $60,000 from issuing equity and $50,000 from issuing 6% bonds at par. ABC used the whole amount of cash to buy a building, which it rents out for $10,000 per year. Given below is the opening balance sheet of ABC Co. for the first year of operations. $$\begin{array} { | l | r | } \hline & \text { Year 1 } \\\hline \text { Assets } & \\\hline \text { Cash } & 0 \\\hline \text { Building } & 110000 \\\hline & 110000 \\\hline \text { Liabilities and Shareholder's equity } & \\\hline \text { Long-term debt } & 50000 \\\hline \text { Shareholders' equity } & 60000 \\\hline & 110000 \\\hline\end{array}$$
At the end of Year 1, the building is valued at $150,000. Also, the market value of bonds has fallen to $49,000. Assume the useful life of the building is 30 years and its salvage value is $50,000 at the end of that period. The rental income is received on the last day of the year. Interest on bonds is also paid on this day.
Prepare the year-end balance sheet and income statement of ABC Co. based on Fair value. Compare the historical and fair values at year-end.