Max is very happy with the work you have done in tidying up his inventory recording and valuation systems and is quite confident that his reports will now give him more useful information and provide him with a truer picture of the position and performance of the business.

However, Max is now concerned that some of the other areas of his business could need a review given some the problems found with the recording of inventory. Max has explained to you that he is still a little confused about the entries required when he was considering purchasing "Ray's Motors". In particular Max is still unsure about the discrepancy between the fair value of accounts receivable and their historic cost and why the fair value was not recorded in a similar way to the other assets.

Max is also concerned that his accounts receivable have become a significant proportion of his assets. Prior to expanding his business operations Max had been owed no more than a few hundred dollars. At present his accounts receivable figure totals $26,500 and this increased to $56,419 once Max purchased the group of assets and started producing his DIY Clean Air Turbo System. Max has been able to ascertain that at the beginning of the financial year the fair value of his accounts receivable was $52,205.

Required

1. Explain to Max why there is a difference between the amount he has recorded for his accounts receivable and the fair value of that asset. Then clarify for Max the reasons why the historic cost is used when recording the purchase of accounts receivable and the impact the fair value will have on that entry.