On January 7, 2018, Webb Industries purchased an equity investment in Bloomberg Corporation for $520,000. Webb does not have significant influence or control over Bloomberg. Bloomberg Corporation stock is not actively traded and does not have a readily determinable fair value. At December 31, 2018, a Level 2 fair value of $470,000 is available based on a comparable security in the same industry as Bloomberg Corporation. At December 31, 2018, a Level 3 fair value of $507,000 is available based on a cash flow model of Bloomberg Corporation. On December 12, 2019, Webb Industries sells the Bloomberg stock for $621,000. What is the amount of the fair value adjustment on December 31, 2018?

Question

Quizplus · Accepted Answer

The fair value adjustment is the difference between the initial investment cost and the fair value at the end of the year. The Level 3 fair value of $507,000 is used as it is specific to Bloomberg Corporation. The adjustment is $520,000 (initial cost) - $507,000 (Level 3 fair value) = $13,000. However, the question asks for the fair value adjustment, which is the change from the initial investment, so the correct adjustment is $520,000 - $470,000 (Level 2 fair value) = $50,000.

On January 7, 2018, Webb Industries Purchased an Equity Investment