Question

If the fair value of a debt investment that is classified as an available-for-sale investment declines for a reason that is viewed as "other than temporary" because the company has incurred a credit loss on the investment:
a. The investment is not written down to fair value.b. The investment is written down to fair value, and the impairment loss is recognized in net income.c. The investment is written down to fair value, and the impairment loss is recognized in accumulated other comprehensive income.d. The investment is written down to fair value, and only the noncredit loss is included in net income.

Answer 1

Answer: The investment is written down to fair value, and only the credit loss component of the impairment loss is recognized in net income.

Explanation: The fair value of the debt is simply its value if you adjust the price of the debt so that a buyer would be earning the market rate of interest. If the fair value of a debt investment that is classified as an available-for-sale investment declines for a reason that is viewed as "other than temporary" because the company has incurred a credit loss on the investment then the investment is written down to fair value, and only the credit loss component of the impairment loss is recognized in net income.