USA why are stock rights recorded at cost and not fair value

[Dan Vigneau]

Someone in accounting please help with this question:

On March 4, Year 1, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September 26, Year 1, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock rights had an expiration date of February 1, Year 2. On September 30, Year 1, LVC's common stock had a market value, ex-rights, of $95 per share and the stock rights had a market value of $5 each. What amount should Evan report on its September 30, Year 1, balance sheet for investment in stock rights?

The answer is $4000. It is calculates as FMV of rights/(FMV of rights+FMV of shares)*cost of shares. 5000/(5000+95000)*80000. What I am confused about is why stock rights are recorded at cost rather than adjusted to fair value? Wouldn't the stocks be adjusted to fair value? and if so would they be adjust to 95 or 100? I am so confused.

 

[DTA93433]

It's been a while since I've studied GAAP, but I'll take a crack at this. I'm guessing you feel (in this example) that the stock rights should be recorded at fair value based on FASB No. 123 (Accounting For Stock-Based Compensation). I believe that the stock rights are recorded at "cost" as you say simply because their is no employer/employee relation between Evan Co. and LVC. Unless GAAP has changed, the investment in LVC Common Stock would be recorded at cost on Evan Co's books.