Assume the General Fund has two outstanding investments as of its 6/30/X5 year end, as follows:
-$100,000 Certificate of Deposit, 6 month original maturity, 3% annual interest rate, purchased 4/30/X5
-$500,000 Commercial Paper, 8 month original maturity, 3% annual interest rate, purchased 1/31/X5
The interest revenue that would be recorded in the GAAP-based external financial statements for the General Fund under the fair value method as of 6/30/X5 assuming a 3% interest rate still applies to such investments would be

Question

Quizplus · Accepted Answer

Under the fair value method, interest revenue is recognized based on the effective interest rate, which is calculated based on the purchase price of the investment and the expected cash flows. In this case, both investments have a 3% annual interest rate. However, since the commercial paper was purchased on 1/31/X5 and has an original maturity of 8 months, while the CD was purchased on 4/30/X5 and has an original maturity of 6 months, the effective interest rate for the commercial paper would be slightly higher than that of the CD.

Assuming that the fair value of both investments did not change between the purchase date and the end of the fiscal year on 6/30/X5, the interest revenue for the CD would be:

$100,000 * 3% * (2/12) = $1,500

The interest revenue for the commercial paper would be:

($500,000 * 3% * (8/12)) - ($500,000 * 3% * (5/12)) = $5,250

Therefore, the total interest revenue for both investments under the fair value method would be:

$1,500 + $5,250 = $6,750, which is option C.

Assume the General Fund Has Two Outstanding Investments as of Its