Question

On July 2, Year 4, Wynn, Inc., purchased as a short-term investment a $1 million face-value Kean Co. 8% bond for $910,000 plus accrued interest to yield 10%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 4, the bonds had a fair value of $945,000. On February 13, Year 5, Wynn sold the bonds for $920,000. In its December 31, Year 4, balance sheet, what amount should Wynn report for the bond if it is classified as an available-for-sale security?

Answer 1

Answer:

$945,000

Explanation:

In its December 31, Year 4, balance sheet, the amount should Wynn report for the bond if it is classified as an available-for-sale security is $945,000.

The reason is that logically speaking it does not make sense anymore to carry an asset or liability at a book value or indeed any other value other than the fair value,once it is classified as 'available-for-sale' because that is the market value.

'Available for sale' implies that such item is out in the market and hence its market value must be used in the financial statement because that is the amount of money it is likely to realize.

Most importantly, the International Financial Reporting Standards stipulate with clarity that items available for sale should be carried in the financial statements at their fair values