Question

An available-for-sale debt security was purchased on September 1, Year 4, between interest dates. The next interest payment date was February 1, Year 5. Because of a decline in fair value, the cost of the debt security substantially exceeded its fair value at December 31, Year 4. On the balance sheet at December 31, Year 4, the debt security should be carried at

Answer 1

Options Available are:

a) Cost

b) Cost plus the accrued interest paid.

c) Fair value plus the accrued interest paid

d) Fair value.

Answer:

Option D Fair Value

Explanation:

The reason is that the company will have to value this asset using the fair value because the company has invested in debt security for short term investment and wants to earn higher interest income from such investments. The price of debt security in the stock exchange has substantially fallen which means the company must realize the loss on its investment due to this decrease and the only method which provides fair view of the company is Fair Value method. So the debt stock must be recorded at fair value which is also in-accordance with the guidelines of International Accounting Standard Board.