Eastwood Enterprises Owns 300 Bonds of the Van Cleef Company

question 42

Essay

Eastwood Enterprises owns 300 bonds of the Van Cleef Company (5% of the outstanding debt of Van Cleef). Eastwood is trying to determine Van Cleef's fair value. The relevant facts are as follows:
• Eastwood bought the Van Cleef bonds earlier in the accounting period for $1,000/bond at a time when the bonds were publicly traded.
• Since Eastwood bought the bonds, Van Cleef has been delisted and there is no longer an active market in the Van Cleef bonds.
• Eastwood's internal valuation specialist estimates the Van Cleef bonds to be worth $800/bond. Eastwood plans to continue holding the bonds, but may someday sell them if their value increases sufficiently.
Required:
(1) What is the fair value of Eastwood's investment in Van Cleef? Briefly explain your choice of fair value, and relate that choice to the requirements of GAAP regarding fair value measurement.
(2) Prepare a journal entry to record any necessary fair value adjustment.

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Definitions:

Tricyclics

A class of antidepressant medications used primarily to treat depression, characterized by their chemical structure and mechanism of action.

Lithium

A chemical element used primarily in the treatment of bipolar disorder to stabilize mood and reduce the risk of suicide.

Manic Patients

Individuals experiencing mania, characterized by an abnormally elevated mood, energy levels, and activity, often associated with bipolar disorder.

ECT

Electroconvulsive Therapy, a medical treatment most commonly used for severe depression that involves electrically induced seizures under general anesthesia.