A company owns some installment notes that were issued by one of its customers. The customer is not a public company, and its debt is not publicly traded. The company values these notes based in part on market interest rates, and partly on its own judgment of the credit-worthiness of the supplier. The company's own judgment is an example of a:
A) Level 1 input
B) Level 2 input
C) Level 3 input
D) Level 4 input

Question

Quizplus · Accepted Answer

The company's own judgment is considered a Level 3 input because it is an unobservable input and is based on management's assumptions and estimates. Level 1 inputs are observable market inputs, such as quoted prices for identical assets or liabilities. Level 2 inputs are observable market inputs, such as quoted prices for similar assets or liabilities, or inputs other than quoted prices that are observable. Level 4 inputs are unobservable inputs that are used to measure fair value to the extent that observable inputs are not available.

A Company Owns Some Installment Notes That Were Issued by One