Which of the following statements is true regarding investments in securities?

• A. Only equity securities can be classified as held-to-maturity.
• B. Investments in securities can be classified as trading, available-for-sale, or held-to-maturity.
• C. Investments in securities are always recorded at their historical cost and never adjusted.
• D. Debt securities cannot be classified as available-for-sale.

Answer: (B)

Verified step by step guidance

1. Understand the classification of investments in securities: Investments in securities are categorized into three main types: trading, available-for-sale, and held-to-maturity. Each classification has specific accounting treatments and criteria.
2. Clarify the nature of held-to-maturity securities: Only debt securities can be classified as held-to-maturity because they must have fixed or determinable payments and a fixed maturity date. Equity securities cannot be classified as held-to-maturity.
3. Explain the accounting treatment for trading and available-for-sale securities: Trading securities are recorded at fair value, with unrealized gains or losses recognized in the income statement. Available-for-sale securities are also recorded at fair value, but unrealized gains or losses are reported in other comprehensive income.
4. Address the statement about historical cost: Investments in securities are initially recorded at their historical cost, but they are adjusted to fair value depending on their classification (trading or available-for-sale). Held-to-maturity securities are not adjusted to fair value unless impaired.
5. Clarify the classification of debt securities: Debt securities can be classified as trading, available-for-sale, or held-to-maturity, depending on the intent and ability of the investor to hold them.