Mark 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. Mark has explained to you that he is still a little confused about the entries required when he was considering purchasing “Rockworld”. In particular Mark 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.
Mark is also concerned that his accounts receivable have become a significant proportion of his assets. Prior to expanding his business operations Mark had been owed no more than a few hundred dollars. At present his accounts receivable figure totals $13,200 and this will increase to $28,600 once Mark goes ahead with the purchase of the studio “Deafening Racket” he had been investigating. Mark has been able to ascertain that “Deafening Racket’s” current accounts receivable stands at $15,400 but that their fair value is only $10,000.
Required
Explain to Mark why there is a difference between the amount “Deafening Racket” has their accounts receivable recorded at and the fair value of that asset. The clarify for Mark 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.