Question

Beach Co. determined that the decline in the fair market value (FMV) of an investment was below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach's books. The controller would properly record the decrease in FMV by including it in which of the following?

a. Other comprehensive income section of the income statement only.
b. Earnings section of the income statement and writing down the cost basis to FMV.
c. Discontinued items section of the income statement, net of tax, and writing down the cost basis to FMV.
d. Other comprehensive income section of the income statement, and writing down the cost basis to FMV.

Answer 1

B). Earnings section of the income statement and writing down the cost basis to FMV.

Step-by-step explanation:

As per the question, the controller would include 'earnings section of the income statement and writing down the basis of cost to FMV' as the it would be able to record the decline in FMV properly by including these details. The earnings segment of the income statement and the noting down of the cost basis related to the financing(investment) to its FMV. If the securities that are 'available-for-sale' face a loss that is regarded permanent or 'other than temporary', then the security is required to be written down on a new cost basis and must be considered as a realized loss. Therefore, option B is the correct answer.