Fair value is used as the basis for valuation of a firm's debt investments when:

• A. the debt investments are measured at amortized cost under all circumstances.
• B. the debt investments are classified as held-to-maturity securities.
• C. the debt investments are classified as trading or available-for-sale securities.
• D. the debt investments are issued by the firm's parent company.

Answer: (C)

Verified step by step guidance

1. Understand the concept of fair value: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
2. Review the classification of debt investments: Debt investments can be classified as held-to-maturity, trading securities, or available-for-sale securities. Each classification has different accounting treatments.
3. Held-to-maturity securities: These are debt investments that the firm intends and is able to hold until maturity. They are measured at amortized cost, not fair value.
4. Trading and available-for-sale securities: Trading securities are bought and held primarily for selling in the short term, while available-for-sale securities are not classified as held-to-maturity or trading. Both are measured at fair value on the balance sheet.
5. Conclude that fair value is used for valuation when debt investments are classified as trading or available-for-sale securities, as these classifications require fair value measurement under accounting standards.