Which of the following statements about the accounting for debt investments is true?

• A. Debt investments are reported as receivables on the balance sheet.
• B. Unrealized gains and losses on all debt investments are reported in the income statement.
• C. Interest revenue from debt investments is recognized when earned, regardless of when cash is received.
• D. Debt investments are always classified as current assets.

Answer: (C)

Verified step by step guidance

1. Understand the nature of debt investments: Debt investments are financial instruments where an entity invests in debt securities issued by another entity, such as bonds or notes. These investments generate interest revenue over time.
2. Clarify the reporting of debt investments: Debt investments are not reported as receivables on the balance sheet. Instead, they are classified as either current or non-current assets based on the expected holding period.
3. Examine unrealized gains and losses: Unrealized gains and losses on debt investments are not always reported in the income statement. Their treatment depends on the classification of the debt investment (e.g., held-to-maturity, available-for-sale, or trading securities). For example, unrealized gains and losses for available-for-sale securities are reported in other comprehensive income, not the income statement.
4. Analyze interest revenue recognition: Interest revenue from debt investments is recognized when earned, regardless of when cash is received. This follows the accrual basis of accounting, which records revenue when it is earned rather than when payment is received.
5. Evaluate asset classification: Debt investments are not always classified as current assets. Their classification depends on the intent and ability of the entity to hold the investment. If the entity plans to hold the investment for more than one year, it is classified as a non-current asset.