An individual, age 50, purchased an annuity as an investment. Which of the following statements best describes how the annuity will be reported on the individual's financial statements?

• A. The annuity will be reported as a liability until payments begin.
• B. The annuity will be reported as an investment asset at its current fair value.
• C. The annuity will not appear on the financial statements until the individual reaches age 65.
• D. The annuity will be expensed immediately upon purchase.

Answer: (B)

Verified step by step guidance

1. Understand the nature of an annuity: An annuity is a financial product purchased as an investment, typically providing periodic payments to the individual at a later date. It is considered an asset rather than a liability or expense upon purchase.
2. Determine how the annuity is classified: Since the annuity represents a future economic benefit, it is classified as an investment asset on the financial statements. It is not expensed immediately nor deferred until a specific age.
3. Assess the valuation method: The annuity is reported at its current fair value on the financial statements. Fair value represents the price that would be received to sell the asset in an orderly transaction between market participants.
4. Clarify timing of reporting: The annuity is recorded on the financial statements upon purchase, regardless of the individual's age or when payments begin. It does not wait until the individual reaches age 65 or any other milestone.
5. Review the incorrect options: The annuity is not reported as a liability because it does not represent an obligation. It is not expensed immediately because it is an investment, and it does not wait to appear on the financial statements until a specific age.