Question 1. Usual instructions apply to this assignment, too...(look on first assignment) Background Bias Investment Company (BIC) 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 so that the shareholders will know what their underlying shares are worth, which facilitates sales of the limited number of shares. It is early January 2022, and as the junior accountant at BIC, you have been asked by the chief financial officer (CFO) to work with the chief investment officer (CIO) to evaluate and determine the propriety of fair values that the CIO is proposing for a number of investments as of December 31, 2021. In that regard, the CFO asks you to challenge the valuation methodologies that the CIO has assigned to the various investments to ensure they comply with ASU 820 and IFRS 13. The investments are as follows: 1. Marketable equity securities BIC 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, 2021. 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, 2021, 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. 2. Private equity securities BIC 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 companys operations, size and performance are similar to a company whose stock is traded on the NASDAQ. The CIO has taken some of the similar companys 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. 3. Land BIC 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, 2021, 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.

ACCT B460 / Fair Value HW / due MARCH 14 / Page 2 of 7 4. Automobiles BIC owns a group of 10 automobiles, previously used by the senior executives of BIC, that are currently for sale. The automobiles are currently carried at $15,000 per auto for a total of $150,000. They have low mileage and could be sold in either the retail market or the dealer market. The dealer market is an active market and management could access that market the next day. Management has been told by a reputable dealer that the autos could be sold for approximately $13,000 per auto. The retail market is slightly harder to access and would take some time to dispose of the automobiles. Used car pricing guides put the sales prices of the autos at approximately $15,500. The CIO is proposing to measure the fair value of the automobiles at December 31, 2021, at $15,000, the current carrying amount, as he believes that through orderly sales within the next two to three months the automobiles could be sold in the retail market for at least $15,000 per auto. 5. Real estate BIC has an investment in a condominium project that was completed on September 30, 2021. The carrying amount of the condominium at that date was $25 million and reflected the cumulative investments that BIC made to the developer. Through December 31, 2021, there have not been any sales of any of the condominium units and the developer has just declared bankruptcy. BIC has taken over the project, hired a management company to oversee the building and a marketing/sales company to sell the individual units. The CIO hired Ace Appraisers (Ace) real estate valuation and appraisal experts to measure the fair value of the project as of December 31, 2021. Ace ended up valuing the condominium project at $18 million and their report considered a combined approach of comparable sales figures for comparable condominium units as well as a discounted cash flow approach, adjusted for the current economic conditions. Ace acknowledged their understanding of the definition of fair value under ASC 820 and IFRS 13 as an exit price and presented their impeccable qualifications. The CIO believes their valuation is overly conservative and that given a reasonable period of time, 18 months, the marketing/sales company will be able to sell all the units at only a 10% haircut to the total amount invested in the project. He is therefore proposing to value the investment in the condominium project at $22.5 million ($25 million at 90%). Q1-1. For each investment, determine if you agree or disagree with the CIOs valuation approach. If you agree, state your reasons. Also, determine if there are other valuation approaches that could be used. If you disagree, state your reasons and suggest either a different approach or how you might change the current approach and what, if any, adjustments should be made to the valuation. Q1-2. For each investment, determine its classification according to the fair value hierarchy.

ACCT B460 / Fair Value HW / due MARCH 14 / Page 3 of 7 Question 2. Venn Corp. purchased three building some time ago and now believes it needs to test for impairment. Therefore, it needs to determine the fair values of the buildings. Venn has access to a commercial real estate report (shown below) that it intends to use to indirectly estimate the selling price for each building. Square Footage 10,000 20,000 30,000 40,000 50,000 Capitalization Rate 7%............................. $700,000 $1,425,000 $2,000,000 $2,500,000 $3,000,000 8% ........................... 625,000 1,250,000 1,750,000 2,250,000 2,625,000 9% ............................ 550,000 1,100.000 1,550,000 2,000,000 2,300,000 10% .......................... 500,000 1,000,000 I,400,000 1,800,000 2,100,000 Venn has measured the size and estimated a capitalization rate based on location and surroundings properties. These estimates are as follows: Square Feet Capitalization Rate Building A 38,000 7% Building B 41,000 8% Building C 46,000 10% Estimate the fair value of each building.

ACCT B460 / Fair Value HW / due MARCH 14 / Page 4 of 7 Question 3. Rossi Company owns three corporate bonds as temporary investments. Rossi has assembled the following matrix of bond price data for actively traded bonds which can b e used to indirectly estimate the selling price of each of Rossi's bonds. Bond Prices as % of par (% of par) Bond Ratings Term (in years) AAA AA A BBB BB 2 103.85 103.56 102.71 102.37 100.29 5 103.66 102.53 101.45 100.17 98.50 10 101.64 100.29 99.50 98.54 91.98 20 95.66 91.49 90.00 89.31 82.06 Rossi has determined the time to maturity and has also looked up the bond rating from Standard & Poors for each of the bonds, as follows: Estimate the fair value of each bond. Par is, as is typical, $1,000 face per bond. Term (years) Bond Rating Bond 3 4 AAA Bond 4 17 BB Bond 5 8 A

ACCT B460 / Fair Value HW / due MARCH 14 / Page 5 of 7 Question 4. In the acquisition of the Sanchez Company, Medina Inc. acquired a customer list and a franchise agreement. Medina used the expected cash flow approach for estimating the fair value of these two intangibles. The appropriate interest rate is 8%. The potential future cash flows from these intangibles are as follows: Customer List: Outcome 1 20% probability of $45,000 cash flows at the end of the year for 5 years Outcome 2 30% probability of $19,000 cash flows at the end of the year for 4 years Outcome 3 50% probability of $10,000 cash flows at the end of each year for 4 years Franchise agreement: Outcome 1 10% probability of $475,000 cash flows at the end of the year for 10 years Outcome 2 25% probability of $17,000 cash flows at the end of the year for 5 years Outcome 3 65% probability of $3,000 cash flows at the end of each year for 3 years 4a. Using the expected cash flow approach, determine the fair value of each intangible asset. 4b. If these amounts were to be used in the negotiation of the sale of Sanchez Company to Medina, Sanchez would argue for higher or lower values for probabilities, cash flows, and # of years? What about for Medina?

ACCT B460 / Fair Value HW / due March 14 / Page 1 of 7 Question 5. Huddell Company purchased Goodman Medical Services LLC at the beginning of Year 1. One of the assets of Goodman is a pharmacy license issued by the city of New Orleans. These licenses are valuable, but they trade infrequently, and the last separate sale of a similar license was 10 years ago. Accordingly, Huddell has determined that an income approach would be necessary to determine the fair value of the acquired business license. Because similar licenses are sometimes sublicensed, or rented, in exchange for a royalty fee based on total pharmacy revenue, Huddell can use a "relief-from-royalty" method to estimate the fair value of the license. Huddell has determined that the prevailing market royalty rate for such an arrangement is 2.0%. Using this approach, the fair value of the license is the present value of the after-tax royalties that Huddell is avoiding by owning the license. Huddell has generated the following inputs for use with the "relief-from-royalty" method: Royalty rate: 2.0% of total pharmacy revenue (before subtracti ng any expenses) Discount rate: 14.0% Expected pharmacy revenue in Year 1: $300,000 Expected growth rate in pharmacy revenue each year for Years 2 through 5: 8% Huddell expects rapid revenue growth for the next five years, but then the growth will slow to a sustainable long-term level. Expected growth rate in pharmacy revenue each year after five years (Year 6 and beyond): 3.0% Income tax rate: 30% Using these data, estimate the fair value of the pharmacy license.

ACCT B460 / Fair Value HW / due MARCH 14 / Page 2 of 7 Question 6. Nguyen Company has purchased a stone quarry for $8 million. Nguyen must now estimate the fair values of the assets acquired in the purchase in order to properly record the acquisition. One of the assets is a rock crushing system to make gravel. This system includes a crusher, a conveyer belt, and a control room. Because rock crushing systems such as this are designed for the quarry in which they are located, there is no practical way to directly determine a selling price for this particular system. However, Nguyen got a bid for $850,000 to duplicate the system with new construction. The existing system has been in use for six years, and such systems are typically assumed to have a useful life of 16 years with a 5% salvage value. Using these data, estimate the fair value of the rock crushing system so Nguyen can record