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 written down to fair value, and only the noncredit-loss component of the impairment loss is recognized in net income.
B) The investment is written down to fair value, and the entire impairment loss is recognized in net income.
C) The investment is written down to fair value, and only the credit-loss component of the impairment loss is recognized in net income.
D) The investment is written down to fair value, but none of the impairment loss is recognized in net income.

Question

Quizplus · Accepted Answer

The correct answer is C because when a debt investment classified as available-for-sale suffers an impairment that is considered "other than temporary" and involves a credit loss, the investment is written down to its fair value with only the credit-loss component of the impairment recognized in net income. This approach separates the credit loss, which reflects the decreased ability to collect all amounts due according to the contractual terms, from other factors that might affect the fair value but do not impact net income directly.

If the Fair Value of a Debt Investment That Is