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Chapter 12: Q27. (page 610)

Franklin Corp. has a debt investment that it has held for several years. When it purchased the debt investment, Franklin classified and accounted for it as an available-for-sale. Can Franklin use the fair value option for this investment? Explain.

Short Answer

Expert verified

No, Franklin cannot use the feature of the fair value option for this investment.

Step by step solution

01

Definition of Fair Value Option

The fair value option provides a facility for the corporate to record its asset at fair value till the ownership of that instrument is transferred.

02

Use of fair value option

Franklin cannot use this feature because this selection is merely available for the first-time purchase of the financial instrument. Secondly, Franklin reported debt investment as available purchasable. The corporate that chooses fair value must report and classify its investment on fair value. Hence, Franklin cannot use the fair value option for this debt investment.

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