Question

Which of the following is NOT a reason why an investor might record at least some amount of credit loss for an available-for-sale investment in net income?

Multiple Choice

• The investor intends to sell the investment.

• The investor believes it is “more likely than not” that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the current year.

• The investor determines that a credit loss exists on the investment.

• The investor believes it is “more likely than not” that there is a non-credit loss on the investment.

Answer 1

The investor records some amount of credit loss for available for sale investment in net income if there is decline in fair value of debt investment for reasons other than being temporary.At balance sheet if debt’s fair value is lower than amortized cost and entity decides not to sell property and more likely than not, the entity won’t be required to sell before recovery, then it should be ascertained as if decline in value is due to credit related factors or non-credit related factors.

In the question, it is given that there is more likely that there is no credit loss on investment. This cannot be reason because reason as per standards can only be credit or non-credit related.

Thus, correct option is D. The investor believes it is “more likely than not” that there is a non-credit loss on the investment.