Question

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be?

1) its original cost.
2) its fair value at the date of the transfer.
3) the lower of its original cost or its fair value at the date of the transfer.
4) the higher of its original cost or its fair value at the date of the transfer.

Answer 1

The carrying value assigned to the available-for-sale security should be its fair value at the date of the transfer.

Step-by-step explanation:

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be

1. its original cost.
2. its fair value at the date of the transfer.
3. the lower of its original cost or its fair value at the date of the transfer.
4. the higher of its original cost or its fair value at the date of the transfer.

The correct answer is option 2: its fair value at the date of the transfer. When an investment is transferred from held-to-maturity to available-for-sale, the carrying value of the security is adjusted to its fair value at the date of the transfer.